In the matter of the competition in the provisioning of electric service throughout the state of Arizona: dockett No. U-0000-94-165

REPORT TO THE
ARIZONA CORPORATION COMMISSION
IN THE MATTER OF THE COMPETITION
IN THE PROVISION OF ELECTRIC SERVICE
THROUGHOUT THE STATE OF ARIZONA
DOCKET NO. U-0000-94-165
Submitted By
The Legal Issues Working Group
September 30,1997
REPORT TO THE
ARIZONA CORPORATION COMMISSION
IN THE MATTER OF THE COMPETITION
IN THE PROVISION OF ELECTRIC SERVICE
THROUGHOUT THE STATE OF ARIZONA
DOCKET NO. U-0000-94-165
Submitted By
The Legal Issues Working Group
September 30,1997
TABLE OF CONTENTS
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ES-1
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . ; . . . . . . . . . . . . . . . . ; . . . . . . . . . . . . . 1
PART 1 - SCOPE OF THE COMMISSION'S AUTHORITY . . . . . . . . . . . . . . . . . . . . . 2
1 . I Whether the Commission may authorize "electric service
providers" (as defined in the Rules) to offer generation, billing
and collection, metering and meter-reading services and
other information services on a competitive basis in areas
where such services were previously exclusively provided
by "Affected Utilities." . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Whether the Rules may require Affected Utilities to serve all
customers as the "provider of last resort" if Affected Utilities
no longer have the exclusive right to serve such customers? . . . . . . . . . 9
Whether the Commission may lawfully compel Affected
Utilities to make their distribution and other facilities available to
competitors on demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Whether the Commission may regulate entities as "Electric
Service Providers" under the Rules that are not defined
as "public service corporations" under the Arizona Constitution. . . . . . 14
1.5 Whether the Commission may streamline procedures for
complying with statutes that regulate public service corporations. . . . . 14
PART 2 - RATES AND RATE MAKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1 Cost Allocation and Separation Issues. . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART 3 - STRANDED COST RECOVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 The legal procedures (hearing and/or utility filings) necessary
to determine Affected Utilities stranded costs; legal procedures
necessary to vary the annual level of stranded cost recovery,
change the total amount of stranded cost recovery or change
the mechanism by which stranded costs are recovered . . . . . . . . . . . . 18
3.2 The legal standards relevant to stranded cost recovery
mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.3 The legal standards governing stranded cost recovery
mechanisms (e.g., non-by passable CTC or exit fee) . . . . . . . . . . . . . . 22
3.4 The ACC's powers to "true-up" any initial stranded cost
estimates to eliminate possible overlunder recovery of
stranded cost amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.5 Legal standards for "securitizing" or using public funding
mechanisms for the recovery of stranded costs . . . . . . . . . . . . . . . . . . . 23
3.6 Whether Arizona recognizes a "regulatory compact" as a
binding contract that affects the recovery of stranded costs or
limits the ACC's power to amend regulations affecting public
service corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.7 Whether the ACC has awarded stranded cost recovery for
telecommunications providers or for gas LDC's in Arizona . . . . . . . . . . 23
PART 4 . ACC POWERS/PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.1 Stranded Cost Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.2 Affiliated Interest Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.3.1 Antitrust Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.3.2 In-State Reciprocity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4 Resource Planning Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART 5 . NON-PSC'S . . . . . . . . . . . . . . . . . . . . . . . .
5.1 Municipal Corporations. Non-PSCs with Federal Interests . . . . . . . . . . 31
5.2 Relations Between Non-PSC's and PSC's . . . . . . . . . . . . . . . . . . . . . . . 32
PART 6 . FERC ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.1 ACC's Exclusive Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.1.1 In view of FERC Orders 888, 888-A, 889, 889-A,
FERC decisions, case law, the U.S. Constitution
and the various Federal acts, what exclusive
(or concurrent) jurisdiction may the ACC exercise
in the context of competitive electric energy services,
whether in wholesale andlor retail transactions
considering the interstate nature of the transmission lines? . 33
6.2 FERC's Exclusive Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.2.1 In view of Rules 888, 888-A, 889, 889-A FERC decisions,
case law, the U.S. Constitution and the various Federal
acts, what exclusive (or concurrent) jurisdiction may
FERC exercise in the context of competitive electric
energy services, whether in wholesale and/or retail
transactions within Arizona considering the interstate
nature of the transmission lines? . . . . . . . . . . . . . . . . . . . . . 36
6.3 FERC Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.3.1 What actions taken in Arizona or involving Arizona
public utilities to move to retail competition in the
electric industry (including any formation of an ISO)
will require FERC approvals and what criteria will
FERCapply? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.4 Jurisdictional Separation of Distribution-Transmission Lines. . . . . . . . . 42
6.4.1 The FERC has issued criteria and decisions to assist in
determining what is a distribution line and what is a
transmission line so as to assert appropriate FERC
jurisdiction over transmission lines. What are the
criteria, how should they be applied, and what FERC
actions are required to confirm that determination? . . . . . . . . 42
PART 7 - FEDERAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.1 Two-County Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.1 .I What is it, how does it affect a utility in a competitive
environment, and what resolution is possible? . . . . . . . . . . . 44
I:UOAN\WPGOVINDnWRKGRUPl .RP3 iii
7.2 Federal Rural Electrification Act (and resulting mortgages.
interlocking all-requirements contracts. and related issues) . . . . . . . . . . 47
7.2.1 What is it. how does it affect a cooperative in a competitive
environment. and what resolution is possible? . . . . . . . . . . . 47
7.3 Western Area Power Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.3.1 What affect will its presence. system. contracts. policies
and Federal constraints have on the adoption of retail
competition in electric supply? . . . . . . . . . . . . . . . . . . . . . . . 51
7.4 Interstate Reciprocity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.4.1 In view of the Commerce Clause of the U.S. Constitution.
what can Arizona require of out-of-state entities to
compete in Arizona markets? . . . . . . . . . . . . . . . . . . . . . . . . 51
PART 8 . ANTI-TRUST ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.1 State Action Immunity Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.2 Application of Traditional Antitrust Principles . . . . . . . . . . . . . . . . . . . . . 55
PART 9 .S UGGESTED CODE CHANGES . . . . . . . . . . . . : . . . . . . . . . . . . . . . . . . . 55
9.1 Federal Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
9.2 The Arizona Constitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
9.2.1 Whether Constitutional amendments are required
either to allow or facilitate competition in generation
supply and other electric services . . . . . . . . . . . . . . . . . . . . . . 56
9.3 Arizona Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
9.3.2 A.R.S. §§ 40-201 and 40-202 . . . . . . . . . . . . . . . . . . . . . . . . 61
9.3.3 Rate Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
A.R.S. 55 40-221 and 40-222 . . . . . . . . . . . . . . . . . . . . . . . . 63
A.R.S.540-284 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
A.R.S.§40-285 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
A.R.S. 5 40-301 et. seq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
A.R.S. 55 40-321, 40-322, 40-331,40-332 and 40-334 . . . . . 65
A.R.S. 5 40-341 et. seq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
A.R.S.540-360et.seq.. . . . . . . . . . .. . . . . . . . ... . . . . . . . 66
A.R.S. 5 40-401 et. seq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Title10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
I 9.3.14 Non-Regulated Activity by Utilities . . . . . . . . . . . . . . . . . . . . . 68
9.3.15 A.R.S.548-1515 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 I Exhibit A Maricopa County Superior Court Cases Involving Electric Restructuring
I Appendix A List of Working Group Participants
Appendix B Chronology of Group Process
Appendix C Special Open Meeting Minutes
I Appendix D Comments of Participants
ARIZONA CORPORATION COMMISSION'S
ELECTRIC RESTRUCTURING LEGAL ISSUES WORKING GROUP
EXECUTIVE SUMMARY
INTRODUCTION
The following summarizes the attached final report of the Commission's Legal
lssues Working Group (the "Working Group" or "group"). Appendix A is a list of the
members of the Working Group.
Working Group participants prepared the report through a series of drafts compiled
from oral comments at public meetings and from written comments from the participants.
These participants are largely responsible for the focus and content of the final report.
The Working Group designated participants ("Reporters") to collect written
comments and contributions from participants. The Working Group assigned Reporters
by subject-matter and the Reporters incorporated material into a report format. The
Reporters' work was collected into a single draft report and participants were given an
opportunity to suggest changes and additional material for the final report. The Reporters
are responsible for the balance and comprehensive nature of the work in the final report.
The Working Group's Reporters are as follows:
Steven M. Wheeler Nature of Restructuring in General and
Stranded Cost Recovery.
Bradley S. Carroll Rights and Duties of Public Service
Corporations and Antitrust lssues
Lawrence V. Robertson, Jr. Scope of Restructuring
Beth Ann Burns Rates and Ratemaking
C. Webb Crockett A CC Powers/Procedures
Jessica J. Youle Non-PSC Issues
Patricia E. Cooper FERC Issues and Federal Issues
Douglas C. Nelson Taxation Issues
Michael M. Grant Legislative Issues
The Legal Division excised incorrect or redundant material from the draft and further
summarized the Reporters' comments. Participants were given opportunity to comment
on a second and third draft of the report. A chronology of the group's activities is attached
to the Report as Appendix B. The minutes of the group's meetings are collected in
Appendix C.
The report consists of Nine Parts, representing issues that the Working Group
identified. The Working Group did not identify legal issues that may affect the matters
discussed in the reports of other working groups involved in electric restructuring.
The attached Appendix D contains participants' separate comments regarding the
Report.
PART 1: SCOPE OF THE COMMISSION'S AUTHORITY
This part summarizes the legal arguments for and against the Commission's power
to adopt the Rules. Part 1.2 contains comments for the Commission to consider in
addressing electric utilities' obligations to serve customers in a competitive environment.
PART 2: RATES AND RATEMAKING
This part identifies legal issues relating to cost allocation and confidentiality of
information under competition.
PART 3: STRANDED COST RECOVERY
This part identifies the issues to be decided in a stranded cost proceeding. It also
identifies standards in the Rules that certain Affected Utilities have challenged as
unreasonably vague. This part identifies legal arguments that may affect stranded cost
recovery mechanisms and stranded cost "true up" proceedings.
PART 4: ACC POWERSIPROCEDURES
This part identifies procedural issues that the Commission may face with respect to
stranded costs, affiliated interests, non-public service corporations, antitrust,
intergovernmental agreements, in-state reciprocity, and resource planning.
PART 5: NON-PSCs
This part discusses the various entities that operate as public service corporations
outside the Commission's jurisdiction. The part discusses the laws that affect the
relationships between these entities and public service corporations.
PART 6: FERC ISSUES
This part identifies the exclusive powers of the Federal Energy Regulatory
Commission ("FERC") and the Arizona Corporation Commission. It identifies initiatives
involving competition that may require FERC approval, such as establishment of an
independent service organization ("ISO"). This part discusses the factors that may
determine the jurisdictional separation of distribution and transmission.
PART 7: FEDERAL ISSUES
This part explains tax-exempt financing under the "Two-County" rule. This part
explains how FERC has addressed this rule with respect to open access for transmission
services. This part discuss the potential effect of the Rural Electrification Act's upon
electric cooperatives in a competitive environment. This part discusses what Arizona may
require of out-of-state entities under the Commerce Clause of the U.S. Constitution.
PART 8: ANTI-TRUST ISSUES
This part explains why utilities will not have state-action immunity from anti-trust
laws to the extent the utilities provide competitive services.
PART 9: SUGGESTED CODE CHANGES
This part identifies the arguments for and against the need for legislative changes
to facilitate competition. It identifies the state statutes that the group discussed.
REPORT OF THE ARIZONA CORPORATION COMMISSION'S
LEGAL ISSUES WORKING GROUP
The Arizona Corporation Commission ("Commission*) es~ablishedth e Legal Issues
Working Group (the "Working Group") pursuant to A.A.C. R14-2-1616 to identify, analyze
and provide recommendations to the Commission on legal issues relevant to Title 14,
Chapter 2, Article 16 of the Arizona Administrative Code (the "Rulesn). See A.A.C. R14-2-
1601 to -1 6 16, "Retail Electric Competition." This report ("Reportn) identifies and analyzes
legal issues which the Commission should consider in evaluating modifications or additions
to the Rules and relevant Arizona statutes.
This Report discusses regulatory policy regarding industry restructuring only to the
extent policy explains or defines a legal issue that is relevant to the Rules. This Report
does not recommend any policy over other policy choices that are available to the
Commission.
Tne working group considered a number of amendments to the existing Rules,
additional rulemaking as well as legislative and constitutional changes. Some participants
believed that any amendments to the Rules were unnecessary. The working group did not
reach unanimity for recommending any particular action. The working group's observations
regarding legal issues in the Report are contained in sections entitled 'Comment."
-.
I z e Repon refers to the Commission~s Legal Division as "Staff." References to
"A5zs:zd Utiiides" are intended to encompass the utilities defined in A.A.C. Rl A-2-1 601 (1 ).'
"ConsuneT1 refers primarily to potential high-volume purchasers of electric generation
services.
PART 4
SCOPE OF THE COMMISSION'S AUTHORITY
1.1 Whether the Commission may authorize "electric service providersJ' (as
defined in the Rules) to offer generation, billing and collection, metering and
meter-reading services and other information services on a competitive basis
in areas where such services were previously exclusively provided by
"Affected Utilities."
ANALYSIS
SCIMMARY OF ARGUMENTS REGARDING
AUTHORIN AND "REGULATORY COMPACT
Certain Affected Utilities have filed actions in the Maricopa County Superior Court,
alleging that the Commission does not have constitutional or statutory authority to adopt
the Rules.' These Affected Utilities maintain that the Arizona Constitution and the
Legislature, pursuant to its power under article XV, section 6, created a policy of "regulated
monopoly" for electric utilities. These arguments also rely on judicial decisions that refer
to Arizona's policy of "regulated monopolyn as being Legislative in origin or, alternatively,
the result of a regulatory contract.
1
Cornpan
may not
Two affected utilities, Morenci Water and Electric and Ajo Improvement
y, serve Morenci and Ajo. Refsrences to Affected Utilities throughout the report
reflect these utilities' positions.
2 Those cases are listed in the attached Exhibit "An to the Report. The
Residential Utility Consumer Office fiied an action to challenge the Rules and has
voluntarily dismissed the action.
Some Affes:ed Utilities mainrain that regulated monopoly for distribution and
generation results in a "reguiatory compacr" between utilities and the state. These Affected
Utilities maintain that their certificates of canvenience and necessity, aurhorized pursuant
to A.R.S. 9 40-281, grant the Affected Utilities exclusive righ~sto deliver electric service,
including generation and retail transmission, within their service territories.
Some participants maintain that competitive pricing unlawfully delegates to the
market the Commission's duty to determine just and fair rates based upon the "fair value"
of a public service corporation's assets. These utilities also maintain that the Rules violate
the Arizona Constitution, article XV, § 14, which requires the Commission to determine "fair
vaiuen of a utility's assets. Other participants maintain that competitive pricing is within the
Commission's constitutional powers to "prescribe just and reasonable classifications to be
used and just and reasonable rates and charges to be made and collected ..." by public
service corporations. Ariz. Const. art. XV, § 3.
Arguments in support of the Rules maintain that the State of Arizona has not
entered into a regulatory compact favoring perpetual monopolies. These participants cite
a decision of the Maricopa County Superior Court as denying a regulatory compact with
respect to a telecommunications PSC, U.S. West Communications, inc. v. Arizona
Coporation Commission, et al., Mar. Co. Sup. Ct. Cause No. CV95-14284 (May 6, 1997).
These participants maintain that no Arizona case expressly uses the term "regulatory
compact." These arguments maintain that Section 40-281 is intended to prevent
unnecessary duplication of lines and facilities within distribution areas; it does not address
competitive pricing of services, like generation, that are separabie from distribution
monopolies.
Panic:pants in support of the Rules maintain that, in a monopoly sett~ngf,a ir vaiue
is used to determine rates artificially, as if the rates were sei in a comperirive market. If
rates are based upon a competitive market, then the Commission's fair value determination
has been accomplished more directly and accurately than in the non-compeiiiive setting.
The Working Group's consensus is that the Coufis or perhaps rhe Legislature
ultimately will determine whether the Commission must have lecislative or constitutional
authority to promulgate the Rules, although some participants recommended that the
Commission should work with the Legislature to obtain authoriry to adopt and implement
the Rules. In the meantime, the Commission should clarify that the Rules do not affect the
exciusivity of distribution services under existing certificates of convenience and necessity.
The Rules should also distinguish between certificates for distribution monopolies and
certificates for other services that are unbundled or separated from distribution services.
ARGUMENTS BY AFFECTED LrTlL/T/ES
Affected Utilities maintain that the Arizona Supreme Court expressly recognized the
existence of a regulatory compact in Application of Tnco Electric Cooperative, Inc., 92 Ariz.
373, 377 P.2d 309, wherein the court stated:
By the issuance of a certificate of convenience and necessity
to a public service corporation the State in effect contracts that
if the certificate holder will make adequate investment and
render competent and adequate service, he may have the
privilege of a monopoly as against any other private utility.
92 Ariz. at 380-381 (emphasis added). See also City of Tucson v. Polar Water Co., 76
Ariz. 404, 265 P.2d 773 (1954) (CC&N recognized as a "contract" between the state and
utility); New England Coalition on Nuclear Pollution v. Nuclear Regulatory Comm'n, 727
F.2d 1127, 1130 (D.C. Cir. 1984) ("the very nature of government rate regulation" is "a
compac: whereby the utiiity surrenders its freedom to charge what the market wiil bear in
exchange for the state's assurance of adequate profits.").
These utilities maintain that "regulated monopoly" is Arizona's legislative policy for
regulating electric utilities. They maintain that this policy was created by, and therefore may
only be modified by, the Arizona Legislature, not the Commission. In support of this
position, the utilities cite cases such as Tonto Creek Estates v. Arizona Corporation
Commission, 177 Ariz. 49, 56, 864 Ariz. 1081, 1088 (Ct. App. 1993), which states that
"[tlhe concept of regulated monopoly arose from the Legislature in granting the
Commission authority to issue certificates of public convenience and necessity to public
service corporations."
The Utilities argue that Arizona courts have determined that the "contract" is one
creating a constitutionally protected "vested property rightn (Trico, 92 Ariz. at 381) and that
the Corporation Commission is under a duty to protect the exclusive right to serve
eiectriciry in the region where the utiiity renders service, under its certificate (Trico, 92 Ariz.
at 387). The court in Trico held as foliows:
We hold that the Corporation Commission was under a to
Trico to protect it in the exclusive right to serve electricity in the
region where it rendered service, under its certificate.
92 Ariz. at 387 (emphasis added). Twenty years later, the Arizona Supreme Court
strengthened and reiterated this view in James P. Paul Water Company v. Arizona
Corporation Commission, 137 Ariz. 426, 671 P.2d 404 (1 983). In that decision, the
Supreme Court reaffirmed the exclusive right to provide service under a CC&N, 137 Ariz.
at 429, and branded as clearly unlawful the Commission's attempt to certificate a
competitor promising lower rates:
. . . the Commission Icst sight of its obligation to respect Pauls
expectation, as a certificate holder, of an opportuniry to provide
service as needed.
137 Ariz. at 431.
Affected Utilities maintain that the elements of this reguiatory compact are long-standing,
clear and obvious. A public service corporation is required to serve those within
its territory, to make extensions and improvements to meet future demands, to subject
many of its business transactions to prior Commission approval and to limit its revenues
and income to those established by the C~mmission.I~n return, the utility is granted a
monopoly for exclusive service rights therein and the constitutional guarantee of just and
reasonable rates that allow it to recover its cost of service and earn a fair return on the fair
value of its properties. Electric public service corporations in this state have committed
billions of dollars of private capital to meet their collective obligations in reliance on this
compact. Cf United States v Wnstar Corp., 1 16 S.Ct. 2432 (1 996) (government
financlaily responsible to regulated business for economic injury suffered by change in
regulatory policy).
The Affected Utilities maintain that the history of the regulatory compact in America
has bean well chronicled. See, e.g.. Sidak and Spulber, 'Deregulatory Takings and Breach
of the Regulatory Contract." 71 NY-U. Law Review 851 (1996); George L. Priest, "The
Pursuant to A.R.S. 5 40-321, et seq., the Legislature purports to give the
Commission the authorrty to order a public service corporation to provide specified
services in an approved manner to customers within the utility's service area.
Moreover, A.A.C. R14-2-202(C) forbids a public service corporation from abandoning
service within its territory without express Commission approval. Thus, once a utility
becomes a regulated public service corporation, it apparently cannot out of the
business" without Commission approval.
I Origins of Utiiiry Regulation and the 'Theories of Regulation' Debate," 36 J.L.& Econ. 289
ARGUMENTS BY CONSUMERS AND STAFF I Potential consumers maintain that a certificate of convenience and necessiry does
I not provide, in eifect, that a public service corporation may "corner the market" on e!ectric
I service. Arizona court decisions refer to regulated monopoly a s a public policy, rather than
a s a contractual obligation. See Ariz. Corp. Comm'n v. Superior Court, 105 Ariz. 56, 59,
1 459 P.2d 489 (1969); Winslow Gas Co. v. Southern Union Gas Co., 76 Ariz. 383, 385, 265
I P .2d 442, 443 (1 954); Pacific Greyhound Lines v. Sun Valley Bus Lines, Inc., 70 Ariz. 65,
71,216 P.2d 404,408 (1 950); Cotp Comm'n v. Pacific Greyhound Lines, 54 Ariz. 159, 177, 1 94 P.2d 4-43 (1939).4 Tne law does not recognize monopoiistic pricing as a vested property
I right. See Columbia Steel Casting v. Portland General Electric, 103 F.3d 1446 (9'"Cir.
I 1996); F. T.C. v. Ticor, 504 U.S. 621 (1992).
The Affected Utilities' interpretation of Section 40-281 also frustrates the
I Commission's authority, which is derived from the Arizona Constitution rather than from a
I legislative delegation. 'Where the Constitution has said that public service corporations
shall be governed by the Corporation Commission in a given respect, it is the last, the I highest, and controlling fundamental law as to that matter." State v. Tucson Gas, Electnt
I Light and Power Co., 15 Ariz. 294, 301, 138 P.781,784 (1914). In the event of a conflict
I between the Commission's constitutional authority and a state statute, the Constitution will
4 I The Legislature recently added Section 40-281 (D) to provide that Section
40-281 should not be construed as "granting or havina srantedn an exclusive franchise
or monopoly to any teiecommunications corporation. If Section 40-281 never granted
I exclusive rights to telecommunications companies, then it follows that the statute never
granted the rights to other pubiic sewice corporations.
prevail. Ehington v. Wright, 66 Ariz. 382, 394, 189 P.2d 209. 217 (1 908); Tucson Gas. 15
Ariz. at 301. 138 P. at 784; State ex re/ Corb~nv . Ariz. Corp. Commn, 174 Ariz. 21 6. 21 9,
848 P.2d 301, 304 (App. 1992).
The Commission's rate making power includes adoption of rules that prescribe the
classifications and methods that will be used to determine rates and charges. See
Consolidated Water Util. Ltd. v. Ariz. Corp. Comm'n, 178 Ariz. 478, 483-85, 875 P.2d at
137, 1 4 2 4 (App. 1994); Woods, 171 Ariz. at 294, 830 P.2d at 81 5; Ethington. 66 Ariz.
at 392, 189 P.2d at 216 (Commission's ''full and exclusive power" extends to "making rules,
regulations, and orders concerning such classifications, rates and charges by which public
service corporations are to be governed.. .. " (emphasis added)).
Some participants maintain that Arizona's Constitution prefers competiiion and
disfavors mon~polies.T~h ese participants cite a decision of the Maricopa County Superior
Court as denying a regulatory compact with respect to a telecommunications PSC, U.S.
West Communications, lnc. v. Arizona Corporation Commission, et a/., Mar. Co. Sup. Ct.
Cause No. CV95-14284 (May 6. 1997). The Rules follow this principle and apply traditional
rate regulation only to natural monopolies, such as companies that erect electric
distribution lines, to prevent harm to the public from monopolistic pricing. Services that
become separable from the natural monopoly, like electric generation, are eligible for
pricing in the competitive markei. The Commission's rate making function may change as
a particular service becomes less essential or integral to the public service performed by
Article XV, 5 15 provides, in pertinent part, that '[m]onopolies and trusts
shall never be allowed in this State ...."
the cDmpany. See Mountain States Tei. and Tei. Co. v. Ariz. Corp. Somm'n, 132 Ariz. 109:
1 16, 644 P.2d 263, 270 (App. 1982).
The changing nature of the electric industry has led one c o ut~o conclude that. while
vertically-integrated electric monopolies may have been toleraied in the past, future
generations should not be bound to a policy based upon the technological limitations of
another time. See Appeal of Pubiic Sen/ice of New Hampshire, 14 7 N. H. 1 3,676 A.2d 1 0 1 ,
104 (1 996). The same court, applying a state constitutional prohibirion against monopolies
similar to Arizona's, held that competition in electricity should be aiiirmed "with all doubt
resolved against the perpetuation of monopolies." id., 676 A.2d at 105. The New
Hampshirs coun upheld retail electric competition despite utilities' arguments that 80 years
of statutes and court decisions granted them exclusive franchises.
COMMENT
None.
1.2 Whether the Rules may require Affected Utilities to serve all customers as the
"provider of last resort" if Affected Utilities no longer have the exclusive right
to serve such customers?
ANALYSIS
A.A.C. R14-2-1606 provides that Affected Utilities will provide electric service
("Standard Offer Tariffs")to all customers within a class in their utility service areas until the
Commission has determined that (1) all consumers in the class have the opportunity to
purchase power on a competitive basis and (2) all stranded costs pertaining to that class
have been recovered. The Affected Utilities' obligation to supply electric generation will
cease when stranded costs are fully recovered and competitive pricing is fully available to
customers.
Affected Utilities maintain that A.A.C. R14-2-1606 requires incumbent urilities to
continue providing electric services to all customers within their utility servic, areas even
though they no longer possess the exclusive right to provide such services (e.g..
generation, billing and collection, meter-reading, etc.). This obligation to serve will not
terminate until some indefinite time in the future. The Affected Utilities maintain that no
other "electric service provider" has a similar obligation. Several utilities have claimed that
the traditional utiliry obligation to serve is legally dependent upon the concomitant exclusive
right to serve. See, e.g., James P. Paul Water Company and Tonto Creek Estates, supra.
Affected Utilities claim that the burden to plan for and serve (at regulated rates that do not
explicitly provide for the recovery of associated costs) these customers is inconsistent with
the free market regime envisioned by the Commission and unlawfully harms the Affected
Utility's competitive position.
Affected Utilities maintain that the Rules should not impose an obligation to serve
in situations where the exclusive right to serve no longer exists, or at least should establish
more definite criteria for terminating an affected distribution utility's obligation to supply
electric generation6 The Affected Utilities maintain that the Rules should explicitly provide
for full recovery of all costs incurred in meeting this obligation.
For example, the Commission could classify customers by the size of their load.
Customers purchasing 1 MW or greater could be classified so that the obligation to serve
6 The "opportunityn to participate in competitive pricing does not mean that
customers have actually availed themselves of the opportunity. The Rules probably
require that the opportunity be available in a meaningful way. The FCC dealt with a
similar issue in In the Matter of Application of Ameritech Michigan Pursuant to Section
277 of the Communications Act of 7934, as amended, to Provide In-Region, Inter LATA
Services in Michigan, CC Docket No. 97-137, Memorandum Opinion and Order
(Released August 19, 1997).
would cease when that customer is able to purchase generarion from anorher supplier. If
that customer returns to the affected distribution utility, the customer remains in the
competitive marketplace notwithstanding the customer's decision not to choose another
supplier. The obligation to provide competitive services may continue for customers
purchasing lesser amounts during the transition until all customers in each class have the
opportunity to receive competitive services such as generation.
The Commission could define the point at which all customers of a class have the
opportunity to participate in the competitive market by using some presumptive time
provisions. For example, customers of a class will presumptively have the opportunity to
participate at least by a certain date, such as January 1, 2003, as provided in A.A.C. R14-
2-1604(D). The Commission could extend the date upon a finding of extraordinary
circumstances, including the Affected Utility's failure or inability to make all its customers
available for competitive generation. The Working Group consensus is that clarification
would be appropriate.
At least one Affected Utility suggests that linking the obligation to serve to "full"
recovery of stranded costs might be too inflexible. This objection suggests that stranded
cost recovery might extend beyond the time that all customers have the opportunity to
purchase competitive power. Many participants maintain that the Commission should
consider addressing this possibility in amendments to the Rules. See R14-2-1606(A).
The working group found that the Commission may not regulate entities that are not
"public service corporationsn as defined in article XV, § 2 of the Arizona Constitution. See
Rural/Metro Cop. v. Arizona Corporation Commission, 129 Ariz. 1 16, 1 17, 629 P.2d 83,
84 (1981).
COMMENT
A. The Commission may consider clarifying the point at which all
customers of a class have the opportunity to participate in the
competitive market.
B. The Commission may address whether the obligation to serve should
be linked to stranded cost recovery that extends well beyond the point
at which all customers of a class have the opportunity to participate in
the competitive market.
C. The Commission may explicitly state in the Rules that the reasonable
costs of meeting the obligation to serve will be recoverable in rates.
D. The Commission may not regulate corporations that do not conduct
activities described in article XV, § 2, Arizona Constitution.
1.3 Whether the Commission may lawfully compel Affected Utilities to make their
distribution and other facilities available to competitors on demand.
See the analysis and comments contained in Section I .I
The Rules contemplate that electric service providers (particularly generators) who
desire to sell to customers within the existing certificated areas of electric utilities will have
access to the distribution facilities of the Affected Utilities subject to terms and conditions
and rates to be established by the Commission. Several of the utilities have argued that
this provision represents an unlawful "taking" of a private utility's property (see Loretto v.
Teleprompter Manhattan C A N Corp., 450 U.S. 419, 102 S.Ct. 3164, 73 L.Ed. 2d 868
(1 982); GTE Northwest, Inc. v. Public Utility Cornmission of Oregon, 321 Or. 458, 900 P.2d
495 (1995)) that is not authorized by any specific Arizona constitutional or statutory
provision.
The Commission Staff maintains (1) the Affected Utilities will be compensated for
access to their distribution lines and for the power produced through their generation
plants; (2) a regulatory taking has not occurred since the Affected Utilities will continue to
use of their property, albeit under competition; and (3) a monopoly is not a property interest
under the Takings Clause of the state or federal constitutions, see Tennessee Electn'c
Power Co. v. Tennessee Valley Authorify, 306 U.S. 1 18, 141 (1 939); Law Motor Freight.
Inc. v. Civil Aeronautics B'd, 364 F.2d 139, 144 (1st Cir. 1966) ( "[Flreedom from
competition is not constitutionally protected.").
Some participants maintain that A.R.S. § 40-331 and/or A.R.S. § 40-332 authorize
the Commission to compel Affected Utilities to "wheel" power from other sellers of
generation to customers capable of being served from existing distribution facilities, upon
a determination that the "public convenience and necessity." These participants cite to
article XV, § 10, which provides that "[all1 electric, transmission ... corporations, for the
transportation of electricity, ... for profit, are declared to be common carriers and subject to
control by law."
Working Group members disagree as to whether A.R.S. 3 40-331 and/or A.R.S.
§ 40-332 apply only to circumstances in which an Electric Service Provider ("ESP A") seeks
to use the facilities of an Affected Utility ("Affected Utility B") in order to serve ESP A's own
customers outside of Affected Utility B's traditional service area. The Affected Utilities
maintain that the statutes do not permit ESP A to use Affected Utility B's facilities to directly
compete for Affected Utility B's customers. The participants also disagree as to whether
these statutory provisions authorize the use of an Affected Utility's facilities by non-public
service corporations that are not and can not be regulated by the Commission.
COMMENT
None.
1.4 Whether the Commission may regulate entities as "Eiectric Service
ProvidersJ' under the Rules that are not defined as "public service
corporationsJ' under the Arizona Constitution.
ANALYSIS
The Rules regulate as an "electric service provider," any "company supplying,
marketing, or brokering at retail any of the services described in R14-2-1605 or R14-2-
1606." A.A.C R14-2-1601(V). The Arizona Constitution allows the Commission to regulate
"public service corporations" which are defined, in relevant part, as "[all1 corporations other
than municipal engaged in furnishing.. . electricity for light, fuel, or power. ..." Ariz. Const.
article 15, 9 2. As the Commission moves toward competitive pricing, it may classify certain
services as less essential to a public service. The Commission may eventually classify
services or "electric service providers" as being outside the Commission's regulatory
authority. See analysis in Part 1 . l . See also, Rural/Metro Corp. v. Arizona Corporation
Commission, 129 Ariz. 116, 117, 629 P.2d 83, 84 (1981) (ACC may not regulate entities
that are not "public service corporations" under article XV, 3 2 of the Arizona Constitution.)
COMMENT
None.
1.5 Whether the Commission may streamline procedures for complying with
statutes that regulate public service corporations.
ANALYSIS
The Rules provide that "electric service providersn may offer competitive generation
and other services under less stringent rate procedures than for Affected Utilities that
provide exclusive services in their existing territories. For example, rates for competitive
generation service are deemed to be just and reasonable to the extent they are "market
determined." See, e.g., R14-2-1612(A). Elec:ric service providers file a tariff for each
service that sets the maximum rate and tens anti conditions that will apply. A.A.C. R14-2-
Certain Affected Utilities maintain that the Rules should require an electric service
provider for competitive generation to follow the established Commission procedures for
rate filings and rate changes, including the extensive cost of service, financial and other
information required by A.A.C. R14-2-103. These arguments maintain that the
Constitution's fair value provisions mandate such procedures for all services, including
competitively priced services. Section 1 .I summarizes the "pro" and "con" arguments on
this position
Some Affected Utilities maintain that legislative changes should be made to
streamline procedures in at least the following areas: confidentiality of utility information
on file with the Commission (e.g., A.R.S. §§ 40-204 and 40-367), existing provisions
regarding rate filings and tariffs (e.g., A.R.S. §§ 40-248, 40-250,40-361, 40-365, 40-367),
standards relating to rate discrimination and preferences (e-g., A.R.S. §§ 40-334, 40-374),
requirements for Commission approval for financings and sale of assets (e.g., A.R.S. $9
40-285, 40-301, et seq.), annual reports, etc.
Certain participants also maintain that the Commission should modify existing rules,
particularly to the affiliated interest rules (A.A.C. R14-2-801, et seq.), the resource planning
rules (A.A.C. R14-2-701, et seq.), the depreciation and rate filing rules (A.A.C. R14-2-102
and 103), and the customer service rules for electric utilities (A.A.C. R14-2-201, et seq.).
Staff and consumers maintain that the Commission may exercise its ratemaking
powers and streamline procedures to facilitate competitive pricing. This includes
streamlining procedures for utilities to comply with statutes governing public service
corporations.
COMMENT
None.
PART 2
RATES AND RATE MAKING
2.1 Cost Allocation and Separation Issues.
ANALYSIS
In the interest of leveling the playing field between non-regulated utility activities and
small businesses, some participants suggested that the rules should (1) preclude utilities
from cross-subsidizing their unregulated activities with funds received from ratepayers
under Commission authorized rates; (2) establish accounting procedures and standards
to prevent cross-subsidization by requiring the utilities to assign direct and indirect costs
to the unregulated activities; and (3) require the unregulated activities to pay fair market
value for the use of utility personnel, services, and equipment and to pay royalties for any
intangible benefit gained through affiliation with the utility.
Some participants maintain that the existence of cross-subsidization would suggest
that regulated rates are too high. The Commission could address cross-subsidization
through orders to show cause. The consensus of the group is that the Commission has
sufficient power to deal with cross-subsidization through rate making orders. These
participants did not see a need to change the Rules at this time.
COMMENT
None.
I:UOAN\WPGOVINDnWRKGRUPl.R P3
2.2 Confidentiality.
ANALYSIS
A participant suggests that A.R.S. § 38-431.02, Notice of meetings, be amended to
provide that documents and other information related to a public body's discussions or
consultations on negotiations, bids, or proposals for power and energy transactions, for
the purchase or sale of fuel, or for the construction, ownership, or operation of generation
or transmission facilities would not be public records, except that any contracts executed
by the public body would be public records unless otherwise exempted by law
The commenter also suggests amending A.R.S. § 40-204 to provide that information
related to negotiations, bids, or proposals for power and energy transactions, for the
purchase or sale of fuel, or for the construction, ownership, or operation of generation or
transmission facilities would not be open to public inspection, unless ordered by the
Commission for good cause shown.
The Working Group generally agreed that confidentiality procedures will have to be
scrutinized at some time. The Working Group sharply disagreed over whether such a
review should take place before or after competition commences.
COMMENT
The working group did not reach a consensus regarding what information
should be confidential, although the group agreed that some confidentiality
should be given to information that the Commission requires to be filed for
regulatory purposes. In that regard, the Commission may provide by rule that
commercially sensitivelproprietary information would be kept confidential
unless, upon notice to the utility that would be affected by disclosure,
extraordinary circumstances justify disclosure.
PART 3
STRANDED COST RECOVERY
3.1 The legal procedures (hearing andlor utility filings) necessary to determine
Affected Utilities stranded costs; legal procedures necessary to vary the
annual level of stranded cost recovery, change the total amount of stranded
cost recovery or change the mechanism by which stranded costs are
recovered.
ANALYSIS
If a utility claims stranded cost recovery in conjunction with a rate case, the issue
would be subject to the same general filing and/or hearing requirements attending other
claimed costs. Similarly, the legal procedures associated with changes to total amounts of
stranded costs, annual levels of recovery or mechanisms by which stranded costs are
recovered may be subject to the same limitations as recovery of other costs in a rate case.
If the Commission establishes a stranded cost recovery mechanism, subsequent changes
to the recovery balance or other details of the plan may be resolved in an abbreviated
proceeding similar to fuel or other adjustment clause mechanisms. See, e.g., Scafes v.
ACC, 118 Ariz. 531, 578 P.2d 612, appeal after remand, 124 Ariz. 73, 601 P.2d 1357
(1978). See also, A.A.C. R 14-2-1607(L).
The elements of proof for stranded cost recovery under the Rules would be
generally as follows:
A. Prove the value of jurisdictional asset or obligation which was:
1. prudent,
ii. acquired or entered into' prior to adoption of the Rules under the
traditional regulation of Affected Utilities.
B. Prove that the market value of the asset or obligation
I. decreased.
ii. as a direct consequence of competition.
C. Prove that the utility mitigated the stranded cost by every reasonable
measure related to the provision of regulated electric sewice which was
I. feasible, and
11. cost-effective.
The burden of proof with respect to "prudence" may, in many cases, already have
been addressed in prior Commission proceedings. Moreover, many of the costs that would
fit within the stranded cost category for Affected Utilities have been (a) explicitly approved
by the Commission, in some cases after expensive prudence reviews8, (b) subject to
review and not challenged by parties in previous rate cases, or (c) required by federal law
or Commission order. Most Working Group participants agreed it would be unnecessary
and unduly expensive and time-consuming to require a utility to "re-litigate" issues
previously reviewed and/or resolved by the Commission. In addition to the presumption
I of prudence, the Commission may employ traditional principles of res judicata, stare
decisis, and regulatory estoppel to prevent unwarranted re-litigation of previously decided
matters. The Working Group's consensus is that the Commission may review prior
I 7 "Acquiredn includes duties existing under law as of the date the Rules
were adopted.
I 8 One participant noted, as an example, that the prudence review of the
planning and construction of the Palo Verde Nuclear Generating Station cost
I approximately $40 million. The result of that review was reflected in a rate settlement
agreement approved by the Commission in Decision No. 57649 (December 6, 1991).
prudence aetermlnatlons that were materially Influenced by extraordinary circumstances.
such as fraud or concealment.
The Commission's regulations provide that "all investments shall be presumed to
have been prudently made, and such presumptions may be set aside only by clear and
convincing evidence that such investments were imprudent, when viewed in the light of all
relevant conditions known or which in the exercise of reasonable judgment should have
been known. at the time such investments were made." See A.A.C. R14-2-103(A)(3)(1).
Certain Affected Utilities believe the standard for utility "mitigationn measures in the
Rules is unlawful, unreasonable, and overly vague. The utilities maintain that the Rules
may be interpreted as allowing the Commission to require utilities to expend potentially
unlimited amounts of private capital and other resources to pursue illdefined business
ventures outside ACC jurisdiction. Other participants comment that Affected Utilities should
be required to use any revenues that are generated by or from the use of personnel,
assets or the credit of the utility to mitigate stranded costs. These participants maintain that
ratepayers should receive the benefit of revenues generated by the regulatory assets,
personnel or credit of the utility.
The consensus of the Working Group is that the Commission may inquire as to the
efforts that utilities have undertaken to reasonably mitigate stranded costs through cost
reductions, efficiency improvements, market expansion and/or the development of new
products and services related to the provision of traditional utility service. Staff suggests
that the Commission may clarify the level of mitigation that is 'reasonablen by borrowing
mitigation concepts from another body of law, like commercial lease law or public
condemnation law.
COMMENT
A. The Commission may accept prior prudence determinations as binding
for stranded cost proceedings absent extraordinary circumstances,
such as fraud or concealment.
B. Although some participants believe no change to the stranded cost
recovery provisions is required, most participants agree that the
Commission should clarify the mitigation standard in the Rules to
define "reasonable" mitigation efforts that reiate to the provision of
regulated utility service.
3.2 The legal standards relevant to stranded cost recovery mechanisms.
ANALYSIS
A.A.C. R14-2-1607(J) provides that stranded costs may only be recovered from
"customer purchases made in the competitive market." Participants disagreed whether
this provision means that stranded costs can only be recovered in the price for competitive
services. These arguments maintain that such a construction is inconsistent with A.A.C.
R14-2-1607(H). They maintain that "stranded costs" are, by definition, are costs that can
not be recovered in the competitive generation market. Participants disagree whether
A.A.C. R14-2-1607(J) conflicts with A.A.C. R14-2-1607(H).
The Working Group's consensus, with the exception of Consumers (who maintain
that the Rules are sufficient to determine stranded costs), is that the Commission should
more precisely define stranded cost recovery mechanisms. The Rules should be amended
to the extent the first sentence in R14-2-1607(J) may be read as limiting the classes of
customers or services that the Commission may designate for stranded cost recovery
COMMENT
See the discussion above.
3.3 The legal standards governing stranded cost recovery mechanisms (e.g.,
non-by passabie CTC or exit fee).
ANALYSIS
The Rules provide that customers who are not eligible to receive competitive
generation services do not, by definition, create "stranded costs" and therefore will not pay
a stranded cost fee. Further, the Rules do not allow stranded cost recovery from purchases
in non-competitive or monopolistic markets. These restrictions may require stranded costs
to be recovered through an exit fee or some other non-usage-sensitive mechanism. The
preferred mechanism for stranded cost recovery is outside the scope of the Working
Group's review. Depending upon the Commission's interpretation of R14-2-1607(J), certain
mechanisms may require amendment or waiver of the Rules
COMMENT
See the discussion in Section 3.2 above.
3.4 The ACC's powers to "true-up" any initial stranded cost estimates to eliminate
possible overlunder recovery of stranded cost amounts.
ANALYSIS
The consensus of the Working Group is that the ACC is not legally required to "true-up"
any reasonable initial stranded cost estimates any more than it is legally required to
true-up reasonable estimates of other costs used in setting rates. However, the
Commission may "true-up" stranded costs.
COMMENT
None.
3.5 Legal standards for "securitizing" or using public funding mechanisms for the
recovery of stranded costs.
ANALYSIS
The participants did not study the legal issues associated with "securitizing" or public
funding mechanisms for the recovery of stranded costs.
COMMENT
None.
3.6 Whether Arizona recognizes a "regulatory compact" as a binding contract that
affects the recovery of stranded costs or limits the ACC's power to amend
regulations affecting public service corporations.
ANALYSIS
This issue engendered considerable disagreement among the Working Group
participants. The arguments regarding a "regulatory compact" are discussed in Part 1 .l.
COMMENT
None.
3.7 Whether the ACC has awarded stranded cost recovery for
telecommunications providers or for gas LDC's in Arizona.
ANALYSIS
The Commission traditionally prescribes rates to avoid stranded costs for any public
service corporation, through rates charged to the utility's remaining customers (telephone)
or recoupment of lost sales margins in rates (gas) or by a combination of both. With
respect to gas LDCs, FERC Order No. 888-A. issued March 3, 1997 (starting at page 488,
et seq.), and the Commission's 1990 Decision No. 50575 contain stranded cost recovery
principles. FERC did not require a showing of prudence or mitigation and the ACC's
decision did not interfere with this pattern.
COMMENT
None.
PART 4
ACC POWERSIPROCEDURES
4.1 Stranded Cost Proceedings.
See the analysis in Part 3.1.
The nature of a stranded cost proceeding will depend, in part, on (1) the
methodology for determining the amount of recoverable stranded costs; (2) who will pay
the stranded cost; and (3) the recovery mechanism (i.e., a surcharge on all ratepayers to
be paid into a common fund, a meter charge, a rate surcharge, etc.).
Also, the Working Group's consensus is the Commission may implement automatic
adjustment clauses in appropriate contexts to allow stranded costs to be adjusted based
upon changed circumstances. Adjustment clauses have been approved in other contexts
in the past and would obviate the need for utilities to make supplemental applications to
the Commission to recoup their stranded costs. See, e.g., Scates v. ACC, 11 8 Ariz. 531,
578 P.2d 61 2, appeal after remand, 124 Ariz. 73,601 P.2d 1357 (App. 1978).
COMMENT
None. See comment to Part 3.1.
4.2 Affiliated Interest Rules.
The Commission's rules relating to public utility holding companies and "affiliated
interests" (See A.A.C. R14-2-801 through R14-2-806), apply to Class A investor-owned
utilities under the jurisdiction of the Commission. A.A.C. R14-2-802(A). Although most
utilities entering the competitive market will likely meet the definition of a "Class A investor-
I:UOAN\WP~OUIND~WRKGRU.PR~P 3 24
owned" utility, some entities seeking to enter the competitive market in Arizona may not be
Class A utilities. The Commission may revise the Rules to address the issues relating to
the affiliated interests of companies not failing within the scope of the Commission's
existing affiliated interest rules. The Commission's regulatory powers may be limited for
entities that are not public service corporations.
COMMENT
None.
4.3 Non-PSC's.
The Commission may regulate only a "public service corporation" ("PSC"a)s
defined in article 15, § 2 of the Arizona Constitution. The same provision expressly
excludes municipal entities from the Commission's jurisdiction. Some participants maintain
that intergovernmental agreements may be used to coordinate, but not regulate,
competitive pricing for non-public service corporations. Certain participants maintain that
the agreements may not allow the Commission to assert regulatory powers over such
entities.
Alternatively, other participants maintain that existing rules, statutes and the
Constitution must be amended to bring non-public service corporations, namely municipal
corporations, under the jurisdiction of the Commission, or some other independent agency.
For-profit subsidiaries of non-PSCs may be subject to the Commission's jurisdiction.
Some question exists whether the Commission may, in such instances, use its affiliated
interest rules to regulate the for-profit affiliate's transactions with the non-PSC. The
Commission regulates affiliated interest transactions of PSCs in A.A.C. R14-2-801 through
-806. The Commission's power to regulate affiliate transactions of a non-public service
corporation may be found in article 15, § 3 of the Arizona Consritution. which provides that
the Commission may require a public service corporation to report information about, and
obtain permission for transactions with, its parent. subsidiary, and other affiliated
corporations. See Arizona Corp. Comm'n v. State, 171 Ariz. 286, 830 P.2d 807 (1 992).
COMMENT
None.
4.3.1 Antitrust Principles.
Non-PSCs and PSCs will be subject to the traditional oversight of the
Federal Trade Commission ("FTCn) and other federal and state agencies in the area of
anti-competitive actions. The FTC is a law enforcement agency with statutory authority
over a variety of industries, including the electric power industry. The FTC enforces the
FTC Act (15 U.S.C. §§ 41-58) and the Clayton Act (15 U.S.C. ��§ 12-27) which prohibit,
among other things, "unfair methods of competition," "unfair or deceptive acts or practices,"
and mergers or acquisitions that may "substantially lessen competition or tend to create
a monopoly."
In some instances the federal antitrust law's definition of "person" or "parties"
embrace cities and municipalities, so that they will be subject to antitrust enforcement
actions. 17 McQuillin Municipal Corporations (3rd Ed. 1990) 534, citing Lafayette v.
Louisiana Power & Light Co., 431 U.S. 963, 98 S. Ct. 1123. Generally, whether actions
of a municipality violate the antitrust laws is a question of the extent to which the actions
taken are authorized or directed by the state pursuant to state policy. Id. Thus, the
Commission and the Courts may have jurisdiction over anti-competitive behavior affecting
PSCs. depending upon the activities undertaken and the nature of the entity which is the
perpetrator of the anti-competitive behavior.
COMMENT
None.
4.3.2 In-State Reciprocity.
The Rules address in-state reciprocity between non-PSCs and PSCs for
purposes of competition. A.A.C. 5 14-2-1611. Further, A.R.S. 5s 11-951 through 954
authorize the Commission and municipal subdivisions of this State to enter into
intergovernmental agreements ("IGAs") to jointly exercise any powers common to the
contracting powers. A.R.S. § 11-952(A). Some interested parties maintain that such IGAs
could be used to facilitate competition between PSCs and non-PSCs by controlling some
of the practices of the non-PSCs through contractual rather than regulatory means.
Some participants maintain that IGAs may not be used to limit the exercise
of an entity's regulatory power. Some participants believe that lGAs could permit
municipalities, or other "public agenciesw as defined in A.R.S. § 11-951 to enter into
agreements with the Commission so that the separate governmental agencies would agree
to exercise their individual powers in a parallel and consistent manner. However, none of
the participants addressed whether an Affected Utility, electric service provider, customer
or other person may enforce such an agreement. The proposed form of such an IGA was
not available for comment.
A.A.C. R14-2-1611 (E) provides as follows:
If an electric utility making a filing under R14-2-1611(D) is an
Arizona political subdivision or municipal corporation, then the
existing service territory of such electric utility shall be deemed
open to compet~tionif the political subdivision or municipality has
entered into an intergovernmental agreement with the Commission
that establishes nondiscriminatory terms and conditions for
Distribution Services and other Unbundled Services, provides a
procedure for complaints arising therefrom, and provides for
reciprocity with Affected Utilities.
An IGA would generally address the respective operations of the
Commission and the political subdivision or municipality, so that their efforts to establish
competition in electric generation are coordinated. An IGA would be based on the general
authority of A.R.S. § 11-952, and deal with the joint exercise of the parties or their
respective authorities to regulate electric operations within their respective jurisdictions.
Specifically, A.R.S. 9 11-952(A) provides:
If authorized by their legislative or other governing bodies, two or
more public agencies by direct contract or agreement may contract
for services or jointly exercise any powers common the contracting
parties and may enter into agreements with one another for joint or
cooperative action . . . .
Staff maintains that an IGA between two governmental entities to agree
to jointly exercise their respective authorities is authorized by A.R.S. §§ 11-951 through
11-954. An IGA will not be used to limit the exercise of an entity's regulatory power in the
public interest The IGA may "confirm that separate governmental entities will exercise
their powers in a parallel and consistent manner." Some participants cite, as an example,
the IGA entered into by the Commission with the Federal Power Commission that was
approved by the Arizona Supreme Court in Garvey v. Trew, 64 Ariz. 342, 170 P.2d 845
Staff maintains that the general provisions of an IGA "will consist of the
powers of the respective state political subdivisions and will explain how the political
I:UOAN\WPGOUINDWWRKGRUPl .RP3 28
subdiv~s~onwsii l coordinate the exercise of their respective political powers." One party
agrees w~thth e general scope of the agreement as descr~bedb y the Commission. Another
believes that the IGA should address whether there is "equal protection of the law for PSCs
and non-PSCs."
Another participant points out that an IGA will not create an independent
regulatory entity with jurisdiction to assure fair and equitable treatment of PSC's and
consumers' purchases in municipal corporations' territories.
Other participants maintain that the IGA statutes only permit public
agencies to exercise jointly held powers. Therefore, so the argument goes, the
Commission may only enter into lGAs with entities which have the same type of regulatory
powers as the Commission. This group of interested parties take the position that non-
PSCs do not have "joint power and authority" with the Commission; thus, no lGAs may be
entered into with such governmental non-PSCs. There appears to be no dispositive case
law in Arizona on the issue, although Gawey v. Trew, 64 Ariz. 342, 170 P.2d 845 (1 946)
and Op. Atty. Gen 184-135 shed some limited light on both sides of the issue. These
participants also maintain that the IGA may not be used to give the Commission power
over municipal corporations since it is specifically denied such power under article XV,
section 2 of the Arizona Constitution.
Some participants claim that the Commission has used lGAs in the past
when it agreed with the public utility commissions on some Indian reservations that the
Commission should set the rates for telephone service on the reservation, even though the
utility commission on the reservation had power to do so. In short, as with many of the
issues facing the Commission, there is no bright-line answer to the issue of how to deal
with the in-state reciproc~ty issues, but the lGAs may be a viable mechanism to facilitate
recrprocity, at least in part.
COMMENT
None.
4.4 Resource Planning Issues.
The Commission provides for resource planning and oversight. See A.C.C. R14-2-
701, et seq. The need for full, formal generation resource planning will likely decrease
once competition is implemented and fully underway. As with any competitive market,
supply and demand factors may provide optimum market efficiency, and an equilibrium will
be reached at some point in the future.
Resource planning ensures that the public is not left without adequate supply, even
for a short period of time. Historically, construction of generation and distribution facilities
required far-reaching resource planning. Advances in technology has progressively
reduced lead-time, thereby permitting quicker response to changes or shifts in demand.
Competitors want an adequate supply, as well as facilities, to meet the anticipated
demand. Competitors want their resource planning information to be confidential.
Resource planning is monitored by federal (such as FERC) and state (such as the I Commission) authorities. As competition commences, the Commission may consider
I additional rulemaking to deal with confidentiality concerns or to protect Arizona's public
from periodic shortages. Oversight may be provided by an independent system operator
as well as consumer organizations.
COMMENT
None.
PART 5
NON-PSC'S
5.1 Municipal Corporations, Non-PSCs witti Federal Interests.
ANALYSiS
\i,lithin Arizona. many different kinds oi "ncn-PSCs" ocerate is e!ecrric uriiities.
-. I nese inc!uce ~nunicipal utilities (owned/opersi;c! by a city or tcwn), s!ectrical discricis,
iriigation districts. agricultural improvement districts and power districts. General gcverning
authority for the municipalities and the districts is found in Artic!e 13 of the Arizona
Constiiuticn, A.R.S. Title 48 (districts) and AA.SST. ile 9 (municipalities). Tribal utilities are
non-PSCs thst are not generally regarded as municipal corporations. Some non-PSCs
provide eiectric service within a defined and exclusive servic~ie ritory; others provide
electric service within the service territories of existing PSCs and other non-PSCs.
A variety of federal interests affect PSCs and non-PSCs. For example, cooperatives'
(PSCs) and municipal corporations' (non-PSCs) cantract for federal preference power; the
federal government has a considerable interest in Tribal activities; federal proprietary
interests exist for faciiities used by certain districts under federal rec!amation law; and the
federal government guarantees. funds or otherwise authorizes financing obligations of
certain PSCs, cooperatives and municipal corporations.
Two parties commented that federal interests might complicate Commission
jurisdictional issues and should be researched. Tine ACC Staff believes a federal interest
in a non-PSC does not preclude the non-PSCJs abiliv to offsr a competitive generation
supply.
COMMENT
5.2 Relations Between Non-PSC's and PSC's.
ANALYSIS
Scne carticipants maintain that the new Ruies aiiow born non-?SCs and FSCs to
provide csmpeiitive generation (but not distributicn) s e n ~ i c sto cus:omers within 2ach
other's se-ice tenitones, subject to certain cor;diiions. One commenter believes the Rules
do not ailow such competition. In the czntext of non-PSC, cmtain statutes were identified
by parties as potentially restricting the authority of PSCs and non-PSCs to compete with
sach other. No participant identified any Arizona law that would preclude non-PSCs from
providing access to their distribution systems and s e w i c area customers. (One
commenter cited A.R.S. 3 9-516 as preventing the Commission from granting CC&Ns over
a rnuniciptlity's service area under czrtain circumstances.) Another participant maintained
that the Commission can authorize PSCs to provide competitive generation to customers
in non-PSC territories. Four parties pointed out that Arizona law does not require non-
P SCs to provide access to their distribution facilities.
Three parties raised issues relating to the impact of Title 9 on the ability of the
Commission to authorize competition among PSCs and non-PSCs. One of these parties
asserts that A.R.S. 5 9-516 prohibits the Commission from authorizing a PSC to compete
with 'municipal corporation^.^ However, by its express terms, A.R.S. 5 9-516 is applicable
only to cfies and towns, not the iull panoply of municipal corporctions or other non-PSCs.
A second cammenter believes Title 9 gives cities and ~ O W i~hSe exc!usive right to provide
electricity within their boundaries. Severs1 commenting parties believe A.R.S. 3 9-516
mccses a ;cncemnaricn ~equirsmenrg n i:.r.i. es and fcwns in crcsr for i e m :o compere
!,viri; PSC3 Ccmmission SiaW C,e!ieves this siaiure does nci iequire such concemnzrion ic
.. . cCer "czmceriiive generaticn supply."
C re ;sry iceniified A.3.S. 68-1 5 1 5 and 'simiiar s;~iures" as possibly heving i f i
i n ti-ccm c er!tive e?ec: an csriain special taxing districts (non-?SCs) if improped!~ c ~ n s t r u e d
a s resii-ic:irc expansion of an existing district, rarher than limiting creation a i new districts.
A. R.S. 43-7 75; aiso may limit an e!ectric district to se!ling only surpius energy outside
its servicz- zrea.
--.
I i!e 40 (reiating to PSCs generally). Title 10 (relating to PSC cooperatives) and
iranchisinc siatutes were raised by various parries as limitations an the genewi ability of
PSCs to c z n c e t e with each other, as well as with non-PSCs. The impact of these statutes
is more fclly addressed in Section 12 of this report.
COMMENT
Ncne.
PART 6
FERC ISSUES
6.1 ACC's Exclusive Jurisdiction.
6.1 .I in view of FERC Orders 888, 888-A, 889,889-A, FERC decisions, case
law, the U.S. Constitution and the various Federal acts, what
exclusive (or concurrent) jurisdiction may the ACC exercise in the
context of competitive electric energy services, whether in wholesale
andlor retail transactions considering the interstate nature of the
transmission lines?
ANALYSIS
FE3C's jurisiidion is limited by iis snaciinc :zwa rc c l y ir;c:ubcs z~clicu iiiiiiss.
It nas incirzc: jurisdicrion over Lransinitting utiiiiiis i k i ~ ~ ccshn piainrs which -i.ay be
brcucnr jursuant to 521 1 of& iedewi Power Ac:. It has 70 jurisdic~ion ever xunic:cais.
FMA's cr RUS borrowers who were brought inro apen access cnly throuci; i-tciprocii'j
C3flCSDiS.
-I. ne Energy Policy Act of 1992 forbids FERC from ordering "rstaii whee!ing" or direct
access to power supply by retaii customers, leavino such orders io :he states' discretion.
See 16 U.S.C.5 824k(h). FERC has affirmed that it is a stats decision to permit or require
retail wnee!ing and has left it to state regdatory authorities to desl with any stranded casts
or stranded benefits occasioned by retail wheeling on facilities or servic~su sed in local
distribution. (62 FR 12274,12408). Further, in 888-A FERC darified that "states have the
authority to determine the retail marketing areas of the e!ectric utilities within their
respective jurisdictions" along with the authoriry to determine the end user services those
utilities provide. (62 FR 12274, 12279).
Additionally, exc!usive jurisdiction has been resewed to the states (and therefore
the ACC) over the following matters: the provision and pricing of retail sales of electric
energy (as opposed to unbundled transmission) and the siting of transmission and
distribution lines. While states retain jurisdiction over local distribution lines, FERC claims
to be the final arbiter of their definition (see discussion in S8.S below).
FERC and state commissions each have jurisdiction over separate aspects of a
retail wheeling transaction: FERC has jurisdiction over rates, terms and conditions of
unbundled retail transmission in interstate cornmerc by public utilities wnile state
~fi -u mmissicnsh ~ vjeur is$ic:icn cver local C~S~TICL:i:tCcTii.i ties. the rares icr a i r i i c ~ uss ing
:hose fac:iiiies :o maki a re:zii sale. and ihe S ~ F / ! C Zif oiivenng $!ex-c ezersy to end
users (62 3 :2 27A. 7 2279.7 2372) even if ~ h e r za re no identiiable iocal disiriburion
fsciiiiies. Thus. In ail cases, syses have the r n e t r s ro ensiirs k a r cusnmers co not avoid
iheir iespcnsibiiiry for stranded costs or benefiis.
Nevertheiess. FERC has funher indicated in 888-,A (and the Federal Power Act
supports such interpretation) that FERC and a s~zicha ve cancurrent junsdic:ion to order
stranded cost recovery when retail customers obtain retaii whee!ing in intestate csmmerce
from public utiiities in order to reach a difierent generation supplier.
If the stzte regulatory authority is not authorized to order stranded cost recavery for
direct retail accEss, FERC may permit a utility to seek a customer-specific surcharge to be
added to an unbundled transmission rate. (Order 888, FERC Stats. & Regs. at 31,824-26;
and 18 C.F.R. 35.25). FERC will not interfere if the state agency has such authority and
has, in fact, addressed such costs, regardless of wnether i t has allowed full, partial or no
recovery.
FERC will be the primary forum for recovery of stranded costs caused by 'retail-turned-
wholesale" customers, such as the creation of a municipal utiiity system to purchase
wholesale power on behalf of retail customers who were formerfy bundled customers of the
historical utiiity power supplier (e.g., by annexing retail customers of anorher service
territory). 18 C.F.R. 35.26. FERC will not intercede in every instance of municipalization,
but only in cases where the new wholesale entity usse FFERC-mandated tnnsmission
access to obtain a new power supply on behalf of reizil customers that were formerly
supplied power by the utility.
iciiicnaily. FERC in 288-A cezzs iiansmlssicn iine sitins as a siaie-exc:usi\~e
7ir;c:icn 3rd wiil nor interfere in a stzie's d e ~ : s i ~2nnd jurisdic:;cn cvi: ILCZ, i. ssues. ~--7E X C
wiil ncr e.ic:ozch on ihe following areas: siate suthoriry over lcctl seriice issues icciucinc
re!i&iiity cci octl ssnic,~a;d ministration of intezwt~d-~esourcc~s arnirga nd uiiiiD/ buy-S~CE
and decand-side decisions, including DSM: authct-iv over utility ,-z orera3on and izsourc
pcCciics: generation siting; and suthonv to impose non-by ~asszcicei stributicn or wrail
stranded COS~c harges along with charges for social or environmenral qrcsrarns. (Order 588
and 18 C.F.R. 35.27)
COMMENT
None.
6.2 FERC's Exclusive Jurisdiction.
6.2.1 In view of Rules 888,888-A, 889,889-A FERC decisions, case law, the
U.S. Constitution and the various Federal acts, what exclusive (or
concurrent) jurisdiction may FERC exercise in the context of
competitive electric energy services, whether in wholesale andlor
retail transactions within Arizona considering the interstate nature of
the transmission lines?
ANALYSIS
FERC appears to have staked out exclusive jurisdiction in unbundled state retail
transactions and requires utilities to implement any state retail access experiments under
the Order 888 pro forma wholesale tariffs. Where specific provisions arz inapplicable for
service to unbundled retail costomers, e.g, filing of individuzl servic agreements and
requirements for customer deposits, public utilities must seek a waiver of those tariff
provisions. (New England Power Company, et al., 75 F.E.R.C. P5-t ,OG8 (19C6).
-- --- - , -. ,Pi !--cic,-eu+.-~ ' am raii Iransmission tar16s 4ieC: Jy 3zciizc Zene~z'lE ~c:~I;c : i; m-cpc7 . 9 )
2nd :/\/as;ingron 'Narer Pgwer {"'NPP") to imciemenr :eraii .zcmee:iiicn experimenrs in
\!lashin~:cn. Idaho and Oregon. WFP's tariffs ?id been Z C C ~ C V Eb~y h e' A/zshingron 2nd
Idaho 3-L--~- L Zrs gulatory commissians and ?GE's were suknitec to Oreson's. i?owe\~er,
FERC ricted :ha1 no state authority had rec;ues;ed t-c7n7C acprcvai a i any of :he seoaraie
retaii iariEs cr variations from the 888 pro forrna %riff (to accsnmodate any special nesds
of a state rstaii access program) and so rejeced the tat-iffs lwiihout prejudice. FERC left
the door ocen to the state commissions for such requesn. instructing that the separate
retail tariff or variations from the pro forma tariff sought should stiil be consistent with
FERCJs open access and comparability principles.
WFO argued that the retail experiments did not constiiute unbundling within the
meaning of Order 888, becausa WPP had simply removed &e onergy component from its
current bundled retail tariff and inc!uded non prcductjon ccsts for transmission, distribution
and general expenses. FERC disagreed and found instead that the tariff inc!uded the
"separation of products that we have determined creates unbundled retail transmission of
power that is within our exclusive jurisdiction." Citing Order 888, FERC noted. 'When a
retail transaction is broken into two products that are sold separately,...we believe the
jurisdictional lines change ..... When a bundled retail szle is unbundled and becomes
separate transmission and power sales transactions, the rzsuiticg transmission transaction
fails within the Federal sphere of influence." Tne Washingon Water Power Compsny,
Docket No. ER97-960-000 (Issued Feb. 25, 1097); 78 F.E.R.C. P61,178; 1997 FERC
LEXIS 306.
. - - - n -is jrcccse- ;~:21i :Zriii. -SE had zsei :he pro icr-2 :arif? addirc s;;Ercea zzs;
recz~vez~nja rces, s i ~ / iacg~rie menrs and iccai cisiriburion crctiisions io i. Neiie';he!ess.
ii was wjsc:ed sinca the Or-~cn Cammission had not mado 2 s;ecific rSqEsSi :hai ?GE
. ..- b e ailcwei such variance from ~ hoepe n accrss canplianc :arm.
,c -c-n C uses PGE to explain ihat acsent FERC s;grcval of a s?ecii?c it~ie
canrnissicn re~uest. the open Eiccess tariff must be used for ail unbundled wiaii
transmission, inc!uding piioi or experimental prcgrarns. In such prosrams, state
commissions may ''determine the rates jurisdicfional to them by ostabiishinc a bundled
deiivery p n c ~(in cluding stranded costs) and then subtracting the utility's open access tariff
rates for transmission and ancillary servic3s." Foriiand General Electric Compsny, Docket
No. ER97-1112-000 (issued Fvlarch 3. 1997); 78 F.E.R.C. P51,219; 1997 .=,, =IIC LEXlS
579.
FERC casts ubuy-selin transactions in a similar jurisdicticnal model. Whers "an end
user arranses for the purchase of generation tom a third pafif supplier and a public utiliiy
transmits that energy in interstate commerce and resells it as part of a 'nominal' bundled
retail sale to the end user." FERC says the retail sale is actually the functional equivalent
of two unbundled sales (one transmission. and the other the sale of power) and that FERC
has exclusive jurisdiction over the transmission component. FERC has acknowledged that
in such a transaction there would also be an element of local distribution which would be
subject to local jurisdiction. (Fed. Reg. Vol. 61, No. 92, p. 21,620).
FERC will also assert exclusive jurisdiction in a holding company or other mupLIa -s tate
situation where a state regulaiov agency decision, 2.g. on stranded cost recovev, could
In short. FE2C claims that 'msrters c i inrers~ate csnmercs. inciucicc :-e vss;
. . iniegrarec e!edric system that sucply the nzticn's industrizi. csmmerc:ai acc ~esiceniial
cusmrners ars the responsibility of [he Federal governmenr." (Siarernenr bv =-,.: ~zace?hA .
klcler. Char. FERC. before the Enersy and Narurzl Rssourcss Committee. Unirec States
Senate, March 30.1097.) As made clear by FEXC Orders 888 and 888-A. 889 SEC 889-A.
this inciudes all transmission transactions, coordination serrices and agreements,
independent system operators, regional power pools, and power exchanges.
COMMENT
None.
6.3 FERC Approvals.
6.3.1 What actions taken in Arizona or involving Arizona public utilities to
move to retail competition in the electric industry (including any
formation of an ISO) will require FERC approvals and what criteria
wiil FERC apply?
ANALYSIS
The majority of the current rules will not require FERC approval. A c-" rnmenter
indicated that FERC cooperation would only be needed in de!ineation of transmission and
distribution lines and perhaps for stranded costs imposition. Hov~everF, ERC's very r e c n t
decisions in PGEand WP, as discussed in 58.2.7 above, provide that the ACC and public
utilities must. in confomlance wiih those decisions, detail and seek FERC pre-zpproval of
all unbundled retail tariffs that deviate in any way from the Order 888 open access
compliance tariffs filed, including those which add stranded cost recovery charges,
:~s;i-~ccacrz narces. i3FJlCS agreemenrs. ?Ti. --2 ~"sr :he 1CC arc zuolic 3i:ili:e. 1LiSi
zraoose 12ek accrcval ~i :he ae!inearicn 5 r:znsmlssicn arc zls:ricbrlcn i n i s as
ciseussea 3e!cw.
Addiiicnally. any proposal for IS0 crearicn (wnether srzre cr ?eficnal), wisvznr IS3
srocadures (inc!uding transfer of operational controi of FEZC jurislictionzi fzc:iiiias).
iransinissicn pricing, a c c s s f ees.t ariiis, expansicn. or eniorcernenr . ~ ~ iai lls o requirr i-7c-3 C
pre-approval. Pacific Gas and Electric Compeny, ei al., Docket Nos. EC96-19-000 and
ER96-1663-000(I ssued November 26, 1996).
In Orders 888 and 8884. FERC has issued specific guidance for fomaticn of an
IS0 whicn apply& v if the /SO is also a control area operator. -I. n e s c FERC principles
include:
The ISO's governance should be structured in a fair and nondiscriminator/
manner.
2. An IS0 and its employees should have no financial interest in the economic
performance of any power market participant. An IS0 should a d o p t a n d
enforce strict conflict of interest standards.
3. An IS0 should provide open access to the transmission system and all
sewices under its controi at non-pancaked rates pursuant to a single,
unbundled, grid-wide tariff that applies to all elicible users in a non-discriminatory
manner.
4. An IS0 should have the primary responsibility in ensuring short-term
reliabiiity of grid operations. Its role in this responsibiiity should be well-defined
and comply with applicable standards set by NERC and ihe regional
reliability council.
5. An IS0 should have control over the operation of interconnected
transmission facilities within its region.
6. An IS0 should identify canstraints on the system and be able to take
operational actions to relieve those constraints within the trading rules
ss:ar~isnec sv :ne governlnc ~ C C VT hese iuies si;oula aromcre e.-i -lc :enr -..- c-s wlnc.
- , -:ye !SO should have approprlare :ncsntives for s5c:ent manacernent and
acninistration and should grccare h a se~iiczs needed fcr such
n a n a s e m e n i and adrninis~raticn in an cpen corncetitive market.
8. An !SO'S transmission and anciilary sewicss pricing policies shcuid prornoie
h e efficient us2 of and investment in generarion, transmission, and
csnsurnprion. An IS0 or an RTG c i which the ISO is a inemcer should
ccnduc: such studies as may be necessav to idenriQ ooprationai problems
or appropriate expansions.
5. An IS0 should make transmission system information public!y available on
a timely basis via an electronic information network consistent with the
Ccmmission's requirements.
10. An IS0 should develop mechanisms to coordinate with neighboring control
arz-as .
11. An IS0 should establish an ADR process to resolve disputes in the first
instance.
FERC h a s not issued specific guidance for non-control area operator ISOJs.
Presumably, their hallmark would be independence wfth r e s ~ e c tto governance and
financial interests to ensure that the IS0 is independent and would not favor any class of
transmission users.9
FERC d o e s not require ISO's. In Rule 888-A, FERC said it does not believe it
'appropriate to require pubiic utilities or power pool to establish ISOJs, preferring instead
to allow time for functional unbundling to remedy undue disc;inination.*
In an order on the proposed PJM IS0 FERC stated: The principle of
independence is the bedrock upon which the IS0 must be built if stakeholders are to
have confidence that it will function in a manner consistent with this Commission's pro-competitive
goals." Order 888-A. FN219, citing Adsntic City Eieciric Compsny, ei a/.,
77 F.E.R.C. P61,148 (1996).
COMMENT
6.4 Jurisdictional Separation of Distribution-Transmission Lines.
6.d.l The FERC has issued criteria and decisions to a s s i s t in determining
what is a distribution line and what is a transmission line so a s to
assert appropriate FERC jurisdiction over transmission lines. What
are the criteria, how should they be applied. and what FEXC actions
are required to confirm that de~ermination?
The answer is unciear. FERC reczcnized in Order No. 888 that oncz retaii
service was unbundled, there wculd be a need to craw a distincrion between facilities used
for transmission and those used b r l ocal distribuii~ns'~o as to leave states with authority
over the servica of de!ivering e!ectric energy to er,d users. Toward that end, FERC has
adopted a case-by-case methodology in delineating between "transmission" and
"distribution" facilities regulated by FERC and those left to the States. FERC has not
established a 'bright linen test. Guidanca wiil develop as FERC issues decisions.
Order 888 requires public utilities to consult with state regulatory agencies
before filing any transmission distribution c!assifications andlor cost allocations (for such
faciiities to be included in rates) with FERC. If those ciassifications and/or cost allocations
have state regulatory support, if the state regulators have specifically evaluated the seven
indicators and any other relevant facts, and if the state's recommendations are consistent
with the principles of Order 888, the Commission wiIl defer to them. FERC has said it
hopes to use this mechanism to take advantage of state regulatory authorities' knowledge
and expertise concerning the facilities of the utilities they regulate. (Order 888
Introduction/Sumrnary, Fed. Reg- Vol. 61, No. 92, P21541).
lo Washington Water Power Company, FN8.
I:UOANVNPSO\LINO~WRKGRUPI.R P3 42
to use in the svsluation procsss:
7 . L?ctl tiis:riburion hciiities are nomaily in c!osa proximiry io rsiaii
customers.
2. Local distribution hciiiiies are primariiy radizl in charac:er,
3. Power Rows into local dis;~buiion systems; ii rare!?, if 2ver: Rows out.
4. When power enters a iocal distribution syslem, it is not :ecansicned
or transported on to some other market.
5. Power entering a local distribution system is consumed in a
comparatively restricted gesgraphical area.
6. Meters are based at the transmissionllocai distribution i n t e ~ a cto
measure flows into the local distribution system.
7. Local distribution systems will be reduced voltage.
FERC added that it would consider jurisdictional recommendations by
states that take into account other technical fadon that the state be!ieves arz appropriats
in light of historical uses of particularfaciiities. Order 888-A rsafimed that approach and
the tests to distinguish between state and Federal jurisdiction (Fed. Reg. Vol. 62, No. 50,
P12.372). The order also recognized that the test does not resolve all possible issues, but
is designed for flexibility to include unique local characteristics and usage. (Rule 888-A, 62
Fed. Reg. 12,274, P12279).
FERC approved such a specific state recommendation in PacZc Gas and
Electric Co., ei a/., Docket No. EL96-48-000 (issued October 30, 1906); 77 F.E.R.C.
P6 1,077; 1996 FERC LENS 1975. Paciric Gas accepted a de!ineation of certain lines of
three major California utiiities as psrt of that state's electric industry restructuring. Tine
. . , .. . uiiiiiies Teszrin :he zbiiiy io inznge :he initial cs:lrrc,iicr ES lses ci :hs iai::li!es :nance.
sincs ir may have muitipie LISEC.
-I n e 'exndng ~lsesm' ethod aca~rnmcdarecs ;zr+ -eguiaior{ sartlernenis.
the cecaiiar~iieso f eich sysrern. the h~s~on~cC : S i ~ ! ~ i ~:ir i1g1 0 L ~ ~ I C "USSiS n ~i5i2 ch
uiiiity s ~tegraredtr ansm~ss~osny stem. Consequenily . ~iffirer-ie sults were wzcnec: io r
each uilliiy's system.
The delineation between transmission and nisikcuiion is impc~antn, ot just
for de?ermining state or Federal jurisdiction, but also, to ensurz etch company's
appropriate recoveq of stranded costs from retail cusroners, for allocation of
administrative and general and operation and maintsnancs expenses, as well as for
development of any acczss charges (and associated cost sucpcri) for use of a utiliv's IS0
grid faciiities.
COMMENT
None.
PART 7
FEDERAL ISSUES
7.1 Two-County Rule.
7.1 .I What is it, how does it affect a utility in a competitive environment,
and what resolution is possible?
ANALYSIS
While one cornrnenter noted %ere is no reason to ssgresaie this particular element
for separate consideration and treatment," others who have raised it believe it important
to discuss because it may, like other Federal issues presented herein, be an impediment
;c a :air'/ P 3i~tic:~arioinn ;he csrnperirifie tzvironmenr csnremgizrsa, 2. !i :he fiuier.
--- C+r;ziri!i :=xC. in Ruie 888 recacnized :he threat of ocen accsss recuiremenrs ia
ccnrinc~cJ S? ci two-counry financing and provided some saiurions.
-
I \4*ic-Coufnin~a ncing or "local furnishii;cl bonds provide 5nancing in the form oiiax-lxemcr
2cncs far "faciiities for the local furnishinc of e!ectt-ic energy or gas" ii iilch kciiiiies
are gar. 3 i a system "providing sewice to the gznerai populous not excocding the lsrger
of $NO C S ~ ~ I ~ U OcUoSun ties or one city and a contiguous county." internal Revenrie Code
gl42(a)(8). The Internal Revenue Servic. has added two additional conditions for such
tax exempt bond status: (I) generally, the total amount of -.Iectriciiy generated by facilities
connected directly to the local grid together wiih the amount generated by that utility's
remote generating facilities, cannot excsed in any year the total amount of eiectricity
consumed in the local service area; or (ii) actual metered flows of e!ednciiy at each
interconnection point are at all times inbound to the local system. A utiiiry with such
financing that ceases to meet these conditions loses the favorable interest rate on such
financing. Tne utility's bondholders lose the tax-sxernpt status of the bonds which have
been sold to them and must be made whole by the utility according to the terms of the
bonds.
Competitive generation may impact this financing. FERC's solution in Order 888 was
to exempt a utiiiry from reciprocal service if providing such service would jeopardize the
tax-exempt status oithe bonds. Order 888, mimeo at 376-377. The IRS also amended
its rules to accommodate a mandatory FERC wheeling order issued under §211 of the
Federal Power Act and retain the tax exempt ststus. I.R.C. §la2(f)(Z).
-.
I ne C Cri iies do ncr disturb wo csunrj 5nanc:nc as ions ss no :5irigis are msce
. -
wnich spec:v sn cobiigation for such a flnancsa inriei to serve ourside 3i : h w~c -.:sunr/
area. Paflies have zrgued earlier in this Ooc!<et ihat this cculd happen if :he uiiiiiy becans
cbligarer: io sewe 5 CLISIO~oEuTts ide of its xis sting ~VO-SOUEC/ sewice terriicry ~r76errh e
-. proposed reraii whee!ing provisions. I ne salurion is for the rules to ciesr!y limit ihs
cbligation to sewe outside of a local furnishing utiliry's txisting semic;. area. Another
solution is for the Commission to include in its definition of recoverable stranded ccsis, any
increase in financing c o s 3 or the stranded cost of any a s s e t s b e c a u s e of local furnishing
requirements.
In 888 4, FERC c!arified that all costs associated with a loss af tax-exempt status,
inciuding the costs ofdeieasing, redeeming and refinancing tax3xempt bonds are properly
considered costs of providing transmission services. FERC explained that .'a customer that
takes service, understanding that such service will result in the loss of tax-exempt status,
shall be responsible for such costs to the extent consistent with Commission policy and a
transmission provider may include in its tariff a provision permitting i t to seek recovery of
such costs ... If the transmission customer is not willing to pay the costs associzted with the
transmission providefs loss of tax-exempt status, the transmission provider will not b e
required to provide the requested service." (Order 888-A; 78 F.E.R.C. P51.220; 1997
FERC LEXIS 463).
An alternative solution is to provide local furnishing utilities with a mechanisin to
modify the schedules described in A.A.C. R14-2-1604(A-D) until such time as a Federal
solution csn be found. FERC has toid Congwss it needs to tind a soiution. (Statement by
r-,:.r zsce:h A. ibloier Cha~r.t- 7r-x C.o efcrt rhe -zc erz-T, ia rc Niiurzi Zeources Csnrnl~~sz
U n rred S tares Senare, March 30. 1 997 )
Scne csrnrnenten srare chat the Rules sncula not b e amended io encauraae usz
of 3uc-csunry iinancing for :he benefit of some. but nor i i l . utiiities. Tnese p2rric:pants
suggesr ihir consumers should not gay cosn oi financing Thar have been inc:sased due
to a ccrporadon's decision to exrend its service ;erntory.
COMMENT
None. See the above discussion.
7.2 Federal Rural Eiectriiication Act (and resulting mortgages, interlocking all-requirements
contracts, and related issues).
7.2.1 What is it, how does it affect a cooperative in a competitive
environment, and what resolution is possible?
The U.S. Congress in 1936 through ihe Rurai Electrification Act (RE Act),
7 U.S.C. 901 et seq., and again in 1903, through the Rural Eiectrification Loan
Restructuring Act, determined that the national intersst would be semed by support of rural
electric service through low cast loans to rural electric cooperatives to enable them to
provide affordable and dependable electric service in sparsely populated areas with loads,
which although vital to a rural economy, cost more to serve. Delivering energy costs more
in rural areas and the capital investment on a per customer basis is substantially higher.
Including awas wi# more dens2 population (the smail towns) in such systems helps to
spread those costs and keeps rates lower.
The Rurai Utilities Service (RUS), an agency of the U.S. Department of
Agriculture, makes or guarantees and administers RE Act loans and regulates certain
cooperative activities. Further, most cooperatives ar? member owned non-profit entities
\,vnlcn :sz 2 :zx ex~mpricn,r .r~ooieci n StOA,c:i,lifj ihs : ~ i i --m, sv~en~ue Zcce (25
U S .S Zi: (c;(l2))t o furrher reducs ihe h i g ~ e:rh tn n o m a -u-slc z s ~ s .
iiUS requires as a c3ndition 70 makin5 3r guarzntes!np any c a n s ic power
supciy 5cr:owers (G&Tc so@erarives)t,h at ;hi2 I ~ r r c wi~nfre r inio RUS til-retuirtments
whoiesale sower contracts with its disiribudcn members 2nd zssipn and glecce such
conriac:s as securiv for the repayment of ihcss !cans or any orher loans which RL'S has
- permitted to be secured punusnt to the RUS morigzge. I ne RUS wnolesale power
contract requires that the rates charged for pcwer a ~ tein ergy prcduca sumcieni wvenues
to enable ihe power supply borrower (the GAT) to timely pay the principal anti interest on
all its debt. RUS relies on the whoiesale power cantracts and its oversight of czopeiatives
to certify to the Federal government that "the sccuriy for the loan is reasonably adequate
and t h e loan will be repaid within the time agreed." 7 C.F.R. §1717.301.
Most of these ioans are anortized over a 35 year period (currently a period
that extends about 20 years beyond the target date for full retail choice) and most RUS
financed systems obtain a new loan or loan guarantse every three or four years in order
to maintain and improve szrvice quality and reliabiiiy. In Arizont, five of the aifscted utility
distribution cooperatives and AEPCO are bound together by an all-requirements wholesale
power contract that does not expire until December 31, 2020. A sixth affected utility,
Navopache Electric Cooperative, is bound until December 37, 2025 by a similar contract
to a New Mexico G&T.
RUS finances, at least in part, eiaht electric systems in Arizona; six aw
affected utilities and two are tribal utility authorities. RUS f i n a n d systems makc safes to
about 6.6 percznt of all electric consumers in Arizona. Federsl taxpayers through RUS
-. .
hcla mcre : h a ? SSEZ miilion :n ours:anding c s k r ic a!ec:iic _i:ii::es r; Arizcrz. ne -esewi
agency k2s said :hat 2 sudden loss of ~OZGf icicm these i i z n r a iys;er;is ~ ~ c unicot aniy
nave d i s a s ~ i o u sef leec:s on the abiliry of the csccerarives tc serve resider;rial cansumers
in sparse!^ popuiared or !ess profiiible areas. ii wouic a i s i x m p r o n i s z 3US ti;orrs io
improve !he quality of life in rural Arizona. Lttter by Blaine :2. Stockicn. Jr.. Assistznr
Administrater, RUS, September "1, 1996 to the ACC.
The competirive generation supply and w s i l i t i c ~te rrninarion of exciusive
Ceriiiicares of Convenience and Necessib~in herent to rhe 4CC t~iecsre sres a tension wiih
the federal regulatory scheme outlined above and intruces on the ail-wquiwments
7, contract. the security for the Federal debt. and ihe morrSaSes he!d on that debt. I ne
mandated use of RUS financed delivery facilities by non-RE Act beneficiaries is also
problernaiic. Such use may cause the cooperatives: (I) to lose their taxexempt status
since revenues Rowing to the cooperatives from non-members n a y we!l exczed 15 percent
of a cooperative's total revenues; (ii) to have problems wiih either current or future
financing under the RE Act: and (iii) due to the retaii rate cap under the Order, create
tension between the distribution cooperative and its G&T, which is obliaated to increase "
rates to the distribution cooperative as load is lost to campetition.
RUS has recommended establishment of a customer specific pricing
mechanism: (I) that considers the distribution-G&T s+mdure of ncn-profits; (ii) that imputes
a rate of return on rate base for sales to nonmembers; (iii) that includes in r a t e s charged
to nonmembers any tax liability imposed by ACC ordered retail choice"; and, (iv) that
TI This pricing mechanism was specifically adopted by FERC in Order 888
for non-jurisdictional transmitting utilities providing open acccss pursuant to reciprocibf
or 921 1 requests. As well, FERC exempted such utilities from the reciprcciry
zces Ycr i v e r r the RUS siicsicy awsv 'rcm irs ir,:zcced 5ene5ciaries in ,l.rri=na. Ctcckrcn
RUS also asks the Ccrnmission tc cansiaer ~hrcugnih e ;recess ihe imcac~
sf ga~iais ~randedc osr recavery on the abiiibj cf the otiiiDj tc repay 'SYS loan and the
resuits of that on RUS abiiity to ccnrinue icw cost financinc in Arizcna in the f ~ t u r e .
Sicckicn Lera'er, p. 1 0.
No soluticn is yet apparent to ihe Rule's conflict with the RLJS system of
interiocking all-requirements wholesaie power ccntrac:slrnot7gage secarip~o ther than the
schedule modification offered by the Rules themselves or a total exernpdon from the R~iles.
One commenter raised these issues and noted that whiie the G&T could
probably sell and has sold excess power (at wholesale) to other entities, the "anti-competitive
feature is at the distribution level" because of the all-requirements contracts.
The commenter adds that G&T financing has been based on those contracts. Another
csmrnent noted only that these are 'levei playing fieid issues reiated to competition among
PSC's and non-PSC's". Tine cooperatives, however, are subject to ACC jurisdiction even
though they are not investor owned utilities.
Some participants maintain that solutions to the cooperatives' problems
include (1) not selling power to non-members or (2) making membership in the cooperative
a condition of service; or (3) match the FERC mechanism that is used to handle this
5nancing tool. Tnese participants are concerned that REA financing does not benefit
requirement if it would threaten their tax exernpt status. Order 888, FN499. RUS has
proposed the other pricing mechanisms to FERC; no Orders or decisions have yet been
made by FERC as to that proposal. Some cooperatives have open access tariffs which
incorporate these pricing principles, but they have not been tested at FERC.
,-hm,plL-=- .:-.fiLi rs -n an -quai basis. -7I ney mainriin :iiai :he hies sncuia i~ore ncaurace :his
- -
Pjce sr -inanc:ns to the ce~rrmenr of orher csmce:i:crs.
COMMENT
Ncm. Sse the above disc~ssicn.
7.3 Western Area Power Administration.
7.3.1 What affect will its presence, system, contracts, policies and Federal
constraints have on the adoption of retaii competition in electric
supply?
ANALYSIS
Western Area Power Administradon (Western), a Federal agency and transmission
provider. is a member of the Southwest Regional Transmission Association, a FERC
tpprovedRegiona1 Transmission Group. Additionally, it is voluntarily complying with
FEilC's oeen accoss concepts through a modified open accass tariff. Consequently, its
presence should not impede implementation of competition in Arizona.
COMMENT
Ncne.
7.4 Interstate Reciprocity.
7.4.1 in view of the Commerce Clause of the U.S. Constitution, what can
Arizona require of out-of-state entities to compete in Arizona
markets?
ANALYSIS
-,
I ne sale and delivery of electricity affects interstate commerce. However,
historically, it has been subject to local regulation, in large part due to the necessity of such
regulztion to protect the public health and safety of local citizens and the administrative
burden of economic regulation of larcjeiy in-state monopolies. As we![, this local character
has bees ,::tsi.~j.isd in baerti ie~isiarionw nica hss spec:ricail\i !eft :eirsin :s~cisrion:G :he
s ~ a t e ss, z s Crder 888 anti the F.tderai Pcwer Ac:.
St2i~re gulation af interstate commerce is subject io terrain liniiar!cns: (I) it inay
not disciminzre against interstate commerce; (,1-1.). it may not wsulaie subjec: maiier which
inherently ;squires uniform national regulation: and. (iiij the s a t e intent znceriyino the
regulaticn may be mere impo1ianc0 than is ;he burden on intarslate commerc$, i.2, ihe
balance of interests must favor state as opposid to nationai interests. Souihem Pacific
Co, v. Arizona. 325 U.S. 761 (1 945).
Csncerns have been raised in this docket that an early mandate of campetitive
generaticn supply, before other states have acted, will unnecessarily sucject AI-izona's
utilities to cutthroat competition from market entrants located nationwide who would not
have e n t e r ~ dth e Arizona market if other markets were available. Sensing a threat to
Arizona's economic and tax base, certain participants asked wherher Arizona could limit
participation here to foreign entities from states which also have retail competition - a true
reciprocity requirement. That may be unlikely, given the three-prong test of Southern
Pacific, but the Working Group has not achieved a consensus on this poini
A state may not create economic barriers to out of state products in order to protect
local interests. Dean Miik Co. V City of Mzdison, 340 U.S. 349 (1951). Instead, the
purpose or benefits of the law, e.g.. public health or welfare must outweigh he burdens on
interstate commerce. Reciprocity agreements between states for the sale of products are
not per se a violation of the Commerce Clause of the U.S. Constitution. However,
mandatory reciprocity requirements prohioiting the sale of products from another s t a t e
unless that state reciprocates is such a violation unless there is a substantial state interest
- -. -
! N ~ I C ~ nci be achieved by crher ~neans.( Grszr, ~~Ianr&ic , -zc:nc , 3s C3. :/. Csrireil.
424 LJ.S. ZE8 i1976).
Arizsna may exen reauiatory jurisdic:ion over sntities thar: ( I ) meer. :he definition
of jurisdicticnai entities in the Arizona Canstiiuiicn. Arizona stztures and the rules; (ii) are
doing business within the State of Arizona; and. (iiij have su5cient minimum csntacts
within the s a t e to suppori the exercise of jurisdiction. Such entities may also be amenable
to jurisdiction by Arizona courts.
In General Motors Corporation 11. Tracy. I ST U.S. Lexis 692; 65 USU 4068 (Feb.
18, 1997), the US. Supreme Court iefi in piac? an Ohio two-tiered tax system, saying Ohio
may tax interstate sellers of natural g a s a t a different and higher rate than it taxes local
distribution companies. The Court did not arrive at this result as a legal proposition.
Instead, court employed a balancing test to delemine the economic harm that the system
pos2d for intestate commerce. After describing the deveioping natural gas industry and
making a distinction between bundled and unbundled service, the Court found that it was
unsuited to gathering facts upon which economic decisions could be made. "The most we
can say is that modification of Ohio's tax scheme could subject LDC's to economic
pressure that in turn could threaten the preservation of an adequate customer base to
support continued provision of unbundled sewices to the captive market." 197 U.S. Lexis
at -
General Motors notwithstanding, the Commerce Clause generally prohibits state
policies that amount to economic protectionism for in-state utilities. Nevertheless, the
Commission can and shoufd avoid policies and rules which put in-state jurisdictional
utilities at a competitive disadvantage to e!ectric service providers located out-of-state or
cur of -1CC's ,unszic:~cn. r-x amoies nc:cce ;raking an acc~ricna;ie newales -encar?
- -
from srevlcus nrfgrareo resaurcz yanninc crceis cnra rhe iclar C C ~ C I I C'c r ar;;-c:ec
uriiirles anc canrinutng an Afiedea Utiiiq s coligar~onio serve nro ihe csrncer!nve znsse-.n
and beyonc.
COMMENT
None.
PART 8
ANTI-TRUST ISSUES
8.1 State Action Immunity Doctrine.
Some participants were concerned about the State-Action Immunity Doctine ("Stais
Action"). State Action, generally provides an exemption Rorn antitrust laws providing that
actions that are taken: I) pursuant to a cieariy anicuiated state policy to dispiacs
competition in favor or regulation; and ii) actively supemised by the state, do not violate
that antitrust statutes. The Arizona legislature as codified this principle in A.R.S. 5 40-286
which provides:
The provisions of title 44, chapter 10, article 1, shall not apply
to any conduct or activity of a pubiic service corporation
holding a certificate of public convenience and necessity
granted pursuant to this article, which conduct or activity is
approved by a statute or this state or of the United States or by
the corporation commission or an administrative agency of this
state or of the United States having jurisdiction of rhe subject
matter.
Affected Utilities will not have a State Action exemption to the extznt they arz
engaging in competitive, as opposed to monopoly, services.
COMMENT
See aisc;ission above.
8.2 Application of Traditional Antitrust Principles.
COMMENT
-7 I ne working group reviewed antitrust issues and decicee ?hat :he ACC does not
nave juriscic:ion to 2nforce vioiations of the antiinst laws. Ani!ir~spi rincicies may need
to be considered to the extent the Commission is concerned a ~ c umt arket power and
monopolistic pricing.
PART 9
SUGGESTED CODE CHANGES
9.1 Federal Statutes.
\Nark Group participants generally agreed that federal si~iutesm ay need to be
changed, among other things, to harmonize FERC and ACC jurisdiction, address potential
antitrust issues and recognize generally the increasingly interstate nature of electricity
sales and deliveries. Cedain of these issues have been addressed in other pcrjons of this
report. No specific federal statutory changes were recommended in re!ation to his section
of the report.
Work Group participants disagrsed whether changes to bderzl stitutes are
necessary to implement the Ruies. Some participants maintained that no amzndments
were required to implement the Rules. Tnese participants also maintain that amendments
should not be undertaken, if at all, until the impact of competition has been rzviewed and
assessed.
r h ~ n g s . zzrmonlze FEZC s n c I C C jur~sdic:~cn. r c c r e s s porenrizi snnrriis; :ssiies anc
recsgnize senerally the incwzsingly inisrs:arz narur? of e!ec:ncip/ sales and deiiveries.
Certain of ihese issues have been addressid in siher 3ortions a i this repcrr. No specific
federal s~aruror/c hanges wers recommenceci in relation to {his sscdcn of rhe report.
9.2 The Arizona Constitution.
9.2.1 Whether Constitutional amendments are required either to allow or
facilitate competition in generation supply and o t h e r electric
services.
ANALYSIS
The Working Group aid not achieve a consensus whether constitutional
amendments are required to implement competiiicn. The \Norking Group debated three
principal issues on this subject:
(1) the ACC's authority to require municipal utilities to open their territories to
competition and regulate their sales to others and their implementation of retail access
(Ariz. Const. art. 15, § 2);
(2) the ACC's power to exercise varying degrees of control over non-PSCs given
the provisions of art. 15, 5 2; and
(3) the ACC's power to determine just and reasonable rates in the competitive
market rather than through traditional rated-return, fair value rzte cases. See art.15, §§
3 and 14).
THE ACC'S POWER OVEFi MUNICIPAL UTILITIES
Affected Utilities maintain that if municipal utilities are to be permitted to serve in the
service a r e a s of Affected utilities, the ACC must have constitutional authority to compel
rn~n~c:caiiti:eos o pen their cwn s z ~ ~:c-srzni cries TC c;rr,ceriticn zr,a ~c ~egularzth e : e r r s
and zzficiticns for opening rhosz :srritorres. The ,AEzs:zd Utiiiiies n?sir,rain 7h21 even if ;he
ACC and a municipal utiiity have authcrity to ccen rhe municipaiity's szr\~icz- t z r r i t o ~ j
pursuanr to an IGA, the ACC wiil nor have the pcwer to rss~tiareth e municipality's ccnduc:.
-,
I ne Affected Utiiities maintain that the ACC wiil ke gowerless to enforce the IGA, respond
to csnsurner complaints or enforce complainis by competitive providers regarding
unbundled rates or other t z r n s and cmdiiions oi se~~icthzat may be unfair or not
cost-justified. Tne Affected Utiiiiies argue that the governing body of the municipal utiiity
wiil be the final arbiter of such complaints (subject to an uncertain standard of judicial
review), not an independent regulator.
Other participants maintain that municipalities are "reguIated" via the ballct box. The
municipalities are governed by elected representatives who are responsive to voters.
Municipalities do not have an incentive to increase investor returns at the expense of
ratepayers. The lack of a profit mctive is a disinc~ntivefo r predatory or anti-competitive
practices.
Affected Utilities maintain that the ACC may not enforce its rate setting powers or
rules upon municipalities' sales of electricity in other utilities' service territories. According
to the Affected Utilities, these differences in regulatory supervision will create significant
variations in costs and flexibility for reguiated and non-regulated market participants.
Some Work Group participants raised several alleged rdvantages which municipal utilities
enjoy over investor-owned PSCs, such a s freedom from various t a x e s and the ability to
issue tax-exempt debt.
,!-..-,- r5 . ,--u ~ ~ ! ~ ~: c~ianarnu rr th~sr Caliiornis I~cKeda ic ~mcarziiveZ C Y ~ C I E ~ EzS m ~ n ~
mu n i c : ~ a ~ i i ;aensd inves~or-ownedu tilities and de~errninecith ar :he issue \ N i S 2 i c n - i i a ~ e r ,
- 7 I n e s e carricipanrs alsc nsintain ihst no camcefiiive advtnizge can be ?stablishei
ce5,uesn :he tax advanrages en!oyed by investar-awned uriiiiies and the Scvernmenfal
~ ~ x e r n p t itch~ats a re available to municipal utiiities.
Cne municipal uriliry proposed to form public szmics sucsidisries or a5liaies ihar
would be regulated by the ACC control. Formation of regulated silbsldianes may partially
address :he Affected Utilities' conczrns about the ACC's lack of jurisdiction over sales by
rnunicipai utilities in the Affected Utilities' territories. The Affected Utilities maintain :hat the
Rules do not require formation of a subsidiary and do not. in any event, address ACCrs
lsck of jurisdiction over their sales in and access to municipal utilities' service territories.
RATE REGULATION OF PSCs
Affsctsd utilities maintain that the Constitution establishes a single definition of PSC
as any corporation engaged in furnishing eledkiciry for light, fuel, or power. Artic!e 15,
Section 3 then requires the ACC to prescribe rates for all PSCs. Article 15, Section 14
requires the ACC to ascsriain the fair value of ail PSCs and use that as the basis for
determining rates. Some Affected Utiiities maintain that Arizona courts have consistently
ruled that these duties are mandatory, and the ACC must exercise this level of supervision
over PSCs. See the discussion in Section 1.1.
Affected Utilities maintain that the Cornpelition Rules essentially envision two kinds
of PSCs and two systems of rate setting - ACC prescribed, fair value cost based rates for
distribution-monopoly 'wires sewice" and market determined rates for competitive
electricity supply and, in some cases, other distribution reiated ssrvices.
Other pariicipanis mainiain ihar the .4CC aiready hzs rhe ocwer :c -e-c zzre
cisiiiburicn mcncpclies difiswnriy from csmperiiivs senemtion suppiy. The12 ;a-?c:canrs
maintain :he ACC is empcwered by the Constitudcn to make such disdnc:icns iasec zccn
its pcwer io prescribe "just and wzisonabie c!assif caticns to be ussd" by 7SCe u r s u s n i
to Anic!e 15. Ssc~ion3 . Distribution monopolies zrz "nzturai monopolies" ihai ~ 3 c i i c u e:a
Le rate-rsguiated io protect the public from ncnopolistic pricing. Tschnciccy e x i s ~ sia
separate distribution monopolies from generation. Geiiewtion supply therefare is s!igible
fcr compstiiive pricing without the risk of rnonopolis:ic pricing that exists for dis:ributicn
nonopclies. Tie United States Supreme Cauri has recognized a market disiir;c:ion
Se$,veen iocai gas distributors and competitive ass supplies in Generzl motors v. T;acy,
- U.S. - (1 997).
Affected Utilities maintain that state constitutional mandates prohibit the transition
to a competitive market as envisioned by the Competition Rules. Additionally, t h e s e
requirements impose needless or burdensome regulatory restraints on the desired gcal -
a fully flexible, free market. For example. Vlese participants maintain th-d t the ACC still
must require the filing of tariffs and the Constitution requires rates that are prescribed by
the ACC and that are based upon fair value. To the extent that the tariff rates a r e
prescribed by or based upon the market, all tariffs will be suspect. As the m a t k t
determines rates either below or above a 'fair valuew premised rate, consumers or
competitors may raise these constitutional requirements to invalidate the market based
price and to demand refunds of collected monies.
Other participants maintain that the Commission's power to prescribe just and
reasonable rates is exclusive and may not be abridged by any other branch of ~ c vc-n.r nent.
Consclicziec. N. i r ~Urt iiirks. Lrc. v ~ ~ I Z Gn_ ;~rrE xf i m m 1 . IT3 AT?,, 2--,- z ,-- m, LC7 37
(C;.A cp. :9 3 ) .T hese panic:panrs mainrain rhir iriic:s XV sec:ion id ci :he Arizona
Cons;iiuiion auihonz?s [he ACC to use the ?sir value of a uriiiry's assers to arriricially
-7 determine jus; and rezisonable rates 2s if they laere set in a ccmpeiitive mar~e:. ! ne same
. -7 goal is achieved. albeit more accurately. tnrcugn pricing in a c3mce~iiivem arke:. ! ney
maintain tha? tariffs are not a barrier to campelition. For ~xample, ihe 4CC uszs
competitive tariffs for S S F ~ ~ Cin~ Sth e te!ecommunicaticns industrj. These participants
maintain that traditional rate regulation may be required for the transition to csmpetition,
and will continue for the foress~abiefu ture for transmission and distribution of electricity.
COMMENT
None.
9.3 Arizona Statutes.
This portion of the report will focus principally on the Working Group's debate
regarding possible changes to the Public Utilities statutes (Title 40).
9.3.1 A.R.S. 5 40-281
This statute and A.R.S. 3 40-282 require utilities to obtain certificates of
convenience and necessity ("Certificatesn) prior to constructing facilities and providing
electric service to the public.
ANALYSIS
The debate regarding certificates of convenience and neczssity is found in Part 1.1
of this Report.
COMMENT
See the Comment to Part 1 .I.
9.3.2 A.R.S. $3 40-201 and 40-202
ANALYSiS
Affscted Utiiiues maintain that i h e ~ 2Si EiUiPS must be a c e n d e i io draw dis~incricns
behvefn rhe !eve!~ i f e g ~ l a iioi ~bne applied :c ihe "1,virss" dis~~buriofunn c:icn and dl arher
c-mpetiiive genewtion and aisMbution reiwed semicss. The 5ec:ed Qiiiiiies nainriin
ihat more definitions should be added to A.R.S. § do-20; to distincuish berwecn
competitive generation and distribution sewices. inciuding definitions for "aiisc:ed utiiiiies."
"e!ectric service providers," "aggregators" and "brokers."
Other pahcicipants maintain that the ACC alrsady has the power to classify additional
entities as competition is cosemed. Thesa participants maintain ihat legislative
classifications are unconstitutional to the extent the cfassifications interfere with the ACC's
rates and cfassification functions.
Affected Utilities and some other participants maintain that, at a minimum, the
Legislature should amend A.R.S. § 40-202 to state the public policy of this state as to
competition and to mandate or allow different regulation for competitive providers, similar
to the statute's provisions relating to telecommunications services.
Other participants agreed that a statement of policy, consistent with adic!e XIV, 91 5
of the Arizona Constitution, would be desirable. Other participants maintain that t h e s t a t e
constitution does not allow statutoq mandates for 'different regulation" of competitive rates
or competitive services.
9.3.3 Rate Statutes
Affected Utilities maintain ihat A.R.S. 940-203, A.R.S. 9s 40-246 to 40-251
and A.R.S. §§ 40-365 and 40-367 assume a fully regulated monopoiy. According to the
.1Zec:~s.,: iiities. :he s;arures ;we :he .ACZ ? i l l ~ C W 2En~d oolioarian :G S S ~ Z C I ~ STZa izs.
iotlow ctra!n ~ . r o c ~ d u r eins allow~ng h a n s s s ro rares and r q u i r e ihe scsiing s r
aublica~icno f all rates. The Aff~ctedU tiiiiies maintain ihat these s ~ a t u ~ e:s~ i ibse~
. , . -. ~ e s \ ~ a l u a r eacm. ended m d possibiv repezied before irnplernentino csmcerriicfl. I ne
,4f%cted Utiiities maintain that aithough ihe ACC should retain a certain levei si jurisdic:icr;
over rnonopoly services, reduced rqulatian is appropriste for competitive ser/icrs. if ncr.
they mainrain that deregulation will nat be achieved and the market wiil not be zllowed to
operate.
Other participants maintain ihat reduced statutory regulation should not be
enacted until the effectiveness of existing and potential competition become kncwn. In the
case of nziural monopoly, regulation will continue to assume the role of a s u b s ~ i t u t efo r
competition. Markets that are not hlly competitive (e.g., oligopolies) require the ACC to
balance its rate control function with a role a s a faciiitator of competition. In -3zctively
competitive markets, they argue that the ACC must secure the prerequisites to competition,
such as open access to distribution systems. subsidy-free pricing of ssrvices,
nondiscriminatory pricing, and efficient market entry. These are ratemaking functions that
the ACC must exercise before one can understand the implications of a p r o p o s d statutory
change. This may explain, to some degree. why Wcrking Group participants hae ve not
come forward with speciiic statutory changes to Title 40.
9.3.4 A.R.S. 5 40-204
Affected Utilities maintain that this statute should distinguish between
monopoly and competitive service providers and relieve competitive providers from the
statute's extensive information and regulation requirements. Affected Utilities maintain that
prcorierar! cicrmadcn fcr :zmce:iiive ?SCa srccid be ?rCiZC:2< :G z FeZiE.7 3X;dfiI thzi:
fully r e g u i a ~ e i ,m cnocciv S C s . 5sc:ec Utiiiiies mzinrairi ~ h a rs iniiar c:;ffcenriaiity
amendrnenrs shoaui be added to A.R.S. dO-CEO, the staw's cuciic recads iwv and Open
Meeting szrures (Titfes 38 and 39).
Other parricicants suggest ihar restricteci or cfcsed accsss ic :r;f~irnation
may discourace or even prevent competition. Lack of competition wiil cantince :he current
rnonopolis?ic pricing and crevent the ACC from reducing the leve! of iegulaiion fcr utilities.
These parricicants maintain that such statutory changes should be sirutinizsd ~ir?fully and
only after competition has commenced.
9.3.5 A.R.S. $5 40-221 and 40-222
These statutes authorize the ACC to establish accounting s:istems and
depreciation standards for PSCs. Affected Utilities maintain that this level of regulation wiil
be inconsistent with and unneczssariiy burdensome on a competitive markeiplzce.
Other participants oppose immediate changes for the reasons stated in
Sections 12.3.2 to 12.3.4.
9.3.6 A.R-S. 5 40-284
Some Affected Utilities maintain that this statute may prohibit c r rzstrict the
transaction of utility business within Arizona by a foreign corporation and may need needs
to be reexamined in the ccntext of the competitive market. These AffeCed Utilities
maintain that this statute might be the appropriate forum to address conczrns about
interstate reciprocity. These arguments maintain that, with the exception of Cslifornia, no
other western state has opened its electric market like Arizona and Arizona utilities may
lecc :c sezx rePjlacsnenT .narxe:s anc 3;;lricSie sc-zrcec c:s;s In s r r e r s x z s r;.larKS?s
:nsr ~ ~3ei sl:cs ea io them.
Other panicipants mainrain ihar fcrticr; csrporaricns aiready cmduc: utiiiw
business in Arizona. These panicipanrs refer to ar.cczl TEGCITS~ ihie i arce .Affected Utiiiiies
as proof rhat Arizona utilities have found replacezer,t l ~ n o l e s a i e;n arkets in other states.
inci~dingC alifornia. These participants mainrain t k t r z!Csin~a r i-estriczinc Arizcna markets
to out-of-sate entrants may violate the U.S. Cons;itudcn's Commerce Ciause ("Commerce
Clause"). The state may not discriminate agains; ir;ters;ate c=mrnerce nor may it unduly
burden interstate transactions. AP~ansasE jec,;ric Cccperzlive v. Af~ansasF SC, 461 U.S.
375 (1 983). Discriminatory state laws and regulations are "per sen invalid under the
Commerce Clause. Philadelphia v. New Jersey, 437 U.S. 617 (I 978).
9.3.7 A.R.S. 5 40-285
This statute provides that ACC aperoval must be obtained before any PSC
may sell, lease, assign, mortgage or otherwise dispose of or encumber its system.
Transfers or other dispositions without an order of the ACC are void. Affected Utilities
maintain that in a competitive marketplace such a statute is antiquated and inconsistent
with the flexibility that utilities need to respond to the demands of the marketplace.
Other participants maintain that these arguments presume the existence
of meaningful competition. fvleaningful competition will not be realized until after the Rules
take effect and the competitive market hss been ~ ; s s e s s e dI.n any event, protections must
be in place to address merger and acquisition zctivities that may result in monopolisiic
activities.
--
Scme ~ ; a ~ i c : p a nstosi nr OEi ;ha: :be ?zies zmr: sclerzricc. ;ci rae ~ ~ a t e ' s
-. exrensive zis;iiburion 2nd iransmlssion sys:i..rs. i nese panc:;anrs hrrhsr mainrain thai
A.R.S. LO-285 applies oniy to systems ;hat are ' n s c e s s z r ~ ":c provide a cuciic s i r v i c ~ .
-,
I nese gsr%c:pznts maintain that in a cmpetiiive seain9 faciiiiies s~ouicn ct 35 .iec:ssa~"
when alternauve providers are available to provide a pubiic s z r ~ i c e .
9.3.8 A.R.S. 5 40-301 e t seq.
- I hese statutes give the ACC power ro s u p e ~ j i s eth e uriiiiies' aurhoriry to
Issue s ~ c c k sb, o nds, notes and other evidences of indebtedness and :o create liens on
their propem/. The starutes void any loan or stock issuance that was ncr approved by the
ACC Affected Utilities maintain that these srarutes assume thzt a sale-source provider of
a basic utiiiry service should be subject to public interes; regulatory jurisdiction. For
example, issuance of too mucn debt may endanger the utility's abiiiv to provide service.
Affected Utilities question the need for these statutes if consumers have the right to choose
competitive generation supply and other distribution related services. Affzcted Utilities
maintain that these statutes restrict their ability to function effectively in a campetitive
marketplace and, unless amended, would call into question the validir/ of ail stock and
financing issues for competitive service providers.
Other participants maintain that the Commerce Clause prevents these
statutes from applying to out-of-state entrants. These partkipants oppcse chances for the
reasons s e t forth in Sections 12.3.2 to 12.3.4 and 12.3.8.
9.3.9 A.R.S. 55 40-321,40-322,40-331,40-332 and 40-334
These statutes pertain generally to regulation of s e r v i e s and facilities
provided by e!ectric utilities. Affected Utilities maintain that thece statutes assume a "one
size 'iis ail" s;aricard 3s :C ihesz suc!ec:s anc assume c~ni~nue-ec ~ul~i!cs r- wulrec.
These aisumenrs mainran t h ~:hi e srzrures ars Inzoorccrizre ,n 3 carneeawe -arKeI rhar
cerermines aaecuare rates. ailccares resaurczs and oic:aies diEenr,c Ieveis cf sewlcz-.
. m Other pariicipanrs oppose changes fcr the resscns ser fcrrli; ,n zsc~ions
12.3.2 io 12.3.4 and 12.3.8.
9.3.1 0 A.R.S. 5 40-341 et seq.
This Artic!e establishes a system for csnversion of overhesd eiectric
fac:liiies. Affected Utilities maintain that, although the need fcr such statutes mzy continue,
their purpose and function should be reexamined in light of the ssparation of regulated
distribution "wires" services from competitive generation and o

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REPORT TO THE
ARIZONA CORPORATION COMMISSION
IN THE MATTER OF THE COMPETITION
IN THE PROVISION OF ELECTRIC SERVICE
THROUGHOUT THE STATE OF ARIZONA
DOCKET NO. U-0000-94-165
Submitted By
The Legal Issues Working Group
September 30,1997
REPORT TO THE
ARIZONA CORPORATION COMMISSION
IN THE MATTER OF THE COMPETITION
IN THE PROVISION OF ELECTRIC SERVICE
THROUGHOUT THE STATE OF ARIZONA
DOCKET NO. U-0000-94-165
Submitted By
The Legal Issues Working Group
September 30,1997
TABLE OF CONTENTS
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ES-1
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . ; . . . . . . . . . . . . . . . . ; . . . . . . . . . . . . . 1
PART 1 - SCOPE OF THE COMMISSION'S AUTHORITY . . . . . . . . . . . . . . . . . . . . . 2
1 . I Whether the Commission may authorize "electric service
providers" (as defined in the Rules) to offer generation, billing
and collection, metering and meter-reading services and
other information services on a competitive basis in areas
where such services were previously exclusively provided
by "Affected Utilities." . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Whether the Rules may require Affected Utilities to serve all
customers as the "provider of last resort" if Affected Utilities
no longer have the exclusive right to serve such customers? . . . . . . . . . 9
Whether the Commission may lawfully compel Affected
Utilities to make their distribution and other facilities available to
competitors on demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Whether the Commission may regulate entities as "Electric
Service Providers" under the Rules that are not defined
as "public service corporations" under the Arizona Constitution. . . . . . 14
1.5 Whether the Commission may streamline procedures for
complying with statutes that regulate public service corporations. . . . . 14
PART 2 - RATES AND RATE MAKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1 Cost Allocation and Separation Issues. . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART 3 - STRANDED COST RECOVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 The legal procedures (hearing and/or utility filings) necessary
to determine Affected Utilities stranded costs; legal procedures
necessary to vary the annual level of stranded cost recovery,
change the total amount of stranded cost recovery or change
the mechanism by which stranded costs are recovered . . . . . . . . . . . . 18
3.2 The legal standards relevant to stranded cost recovery
mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.3 The legal standards governing stranded cost recovery
mechanisms (e.g., non-by passable CTC or exit fee) . . . . . . . . . . . . . . 22
3.4 The ACC's powers to "true-up" any initial stranded cost
estimates to eliminate possible overlunder recovery of
stranded cost amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.5 Legal standards for "securitizing" or using public funding
mechanisms for the recovery of stranded costs . . . . . . . . . . . . . . . . . . . 23
3.6 Whether Arizona recognizes a "regulatory compact" as a
binding contract that affects the recovery of stranded costs or
limits the ACC's power to amend regulations affecting public
service corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.7 Whether the ACC has awarded stranded cost recovery for
telecommunications providers or for gas LDC's in Arizona . . . . . . . . . . 23
PART 4 . ACC POWERS/PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.1 Stranded Cost Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.2 Affiliated Interest Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.3.1 Antitrust Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.3.2 In-State Reciprocity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4 Resource Planning Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART 5 . NON-PSC'S . . . . . . . . . . . . . . . . . . . . . . . .
5.1 Municipal Corporations. Non-PSCs with Federal Interests . . . . . . . . . . 31
5.2 Relations Between Non-PSC's and PSC's . . . . . . . . . . . . . . . . . . . . . . . 32
PART 6 . FERC ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.1 ACC's Exclusive Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.1.1 In view of FERC Orders 888, 888-A, 889, 889-A,
FERC decisions, case law, the U.S. Constitution
and the various Federal acts, what exclusive
(or concurrent) jurisdiction may the ACC exercise
in the context of competitive electric energy services,
whether in wholesale andlor retail transactions
considering the interstate nature of the transmission lines? . 33
6.2 FERC's Exclusive Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.2.1 In view of Rules 888, 888-A, 889, 889-A FERC decisions,
case law, the U.S. Constitution and the various Federal
acts, what exclusive (or concurrent) jurisdiction may
FERC exercise in the context of competitive electric
energy services, whether in wholesale and/or retail
transactions within Arizona considering the interstate
nature of the transmission lines? . . . . . . . . . . . . . . . . . . . . . 36
6.3 FERC Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.3.1 What actions taken in Arizona or involving Arizona
public utilities to move to retail competition in the
electric industry (including any formation of an ISO)
will require FERC approvals and what criteria will
FERCapply? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.4 Jurisdictional Separation of Distribution-Transmission Lines. . . . . . . . . 42
6.4.1 The FERC has issued criteria and decisions to assist in
determining what is a distribution line and what is a
transmission line so as to assert appropriate FERC
jurisdiction over transmission lines. What are the
criteria, how should they be applied, and what FERC
actions are required to confirm that determination? . . . . . . . . 42
PART 7 - FEDERAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.1 Two-County Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.1 .I What is it, how does it affect a utility in a competitive
environment, and what resolution is possible? . . . . . . . . . . . 44
I:UOAN\WPGOVINDnWRKGRUPl .RP3 iii
7.2 Federal Rural Electrification Act (and resulting mortgages.
interlocking all-requirements contracts. and related issues) . . . . . . . . . . 47
7.2.1 What is it. how does it affect a cooperative in a competitive
environment. and what resolution is possible? . . . . . . . . . . . 47
7.3 Western Area Power Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.3.1 What affect will its presence. system. contracts. policies
and Federal constraints have on the adoption of retail
competition in electric supply? . . . . . . . . . . . . . . . . . . . . . . . 51
7.4 Interstate Reciprocity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.4.1 In view of the Commerce Clause of the U.S. Constitution.
what can Arizona require of out-of-state entities to
compete in Arizona markets? . . . . . . . . . . . . . . . . . . . . . . . . 51
PART 8 . ANTI-TRUST ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.1 State Action Immunity Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.2 Application of Traditional Antitrust Principles . . . . . . . . . . . . . . . . . . . . . 55
PART 9 .S UGGESTED CODE CHANGES . . . . . . . . . . . . : . . . . . . . . . . . . . . . . . . . 55
9.1 Federal Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
9.2 The Arizona Constitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
9.2.1 Whether Constitutional amendments are required
either to allow or facilitate competition in generation
supply and other electric services . . . . . . . . . . . . . . . . . . . . . . 56
9.3 Arizona Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
9.3.2 A.R.S. §§ 40-201 and 40-202 . . . . . . . . . . . . . . . . . . . . . . . . 61
9.3.3 Rate Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
A.R.S. 55 40-221 and 40-222 . . . . . . . . . . . . . . . . . . . . . . . . 63
A.R.S.540-284 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
A.R.S.§40-285 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
A.R.S. 5 40-301 et. seq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
A.R.S. 55 40-321, 40-322, 40-331,40-332 and 40-334 . . . . . 65
A.R.S. 5 40-341 et. seq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
A.R.S.540-360et.seq.. . . . . . . . . . .. . . . . . . . ... . . . . . . . 66
A.R.S. 5 40-401 et. seq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Title10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
I 9.3.14 Non-Regulated Activity by Utilities . . . . . . . . . . . . . . . . . . . . . 68
9.3.15 A.R.S.548-1515 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 I Exhibit A Maricopa County Superior Court Cases Involving Electric Restructuring
I Appendix A List of Working Group Participants
Appendix B Chronology of Group Process
Appendix C Special Open Meeting Minutes
I Appendix D Comments of Participants
ARIZONA CORPORATION COMMISSION'S
ELECTRIC RESTRUCTURING LEGAL ISSUES WORKING GROUP
EXECUTIVE SUMMARY
INTRODUCTION
The following summarizes the attached final report of the Commission's Legal
lssues Working Group (the "Working Group" or "group"). Appendix A is a list of the
members of the Working Group.
Working Group participants prepared the report through a series of drafts compiled
from oral comments at public meetings and from written comments from the participants.
These participants are largely responsible for the focus and content of the final report.
The Working Group designated participants ("Reporters") to collect written
comments and contributions from participants. The Working Group assigned Reporters
by subject-matter and the Reporters incorporated material into a report format. The
Reporters' work was collected into a single draft report and participants were given an
opportunity to suggest changes and additional material for the final report. The Reporters
are responsible for the balance and comprehensive nature of the work in the final report.
The Working Group's Reporters are as follows:
Steven M. Wheeler Nature of Restructuring in General and
Stranded Cost Recovery.
Bradley S. Carroll Rights and Duties of Public Service
Corporations and Antitrust lssues
Lawrence V. Robertson, Jr. Scope of Restructuring
Beth Ann Burns Rates and Ratemaking
C. Webb Crockett A CC Powers/Procedures
Jessica J. Youle Non-PSC Issues
Patricia E. Cooper FERC Issues and Federal Issues
Douglas C. Nelson Taxation Issues
Michael M. Grant Legislative Issues
The Legal Division excised incorrect or redundant material from the draft and further
summarized the Reporters' comments. Participants were given opportunity to comment
on a second and third draft of the report. A chronology of the group's activities is attached
to the Report as Appendix B. The minutes of the group's meetings are collected in
Appendix C.
The report consists of Nine Parts, representing issues that the Working Group
identified. The Working Group did not identify legal issues that may affect the matters
discussed in the reports of other working groups involved in electric restructuring.
The attached Appendix D contains participants' separate comments regarding the
Report.
PART 1: SCOPE OF THE COMMISSION'S AUTHORITY
This part summarizes the legal arguments for and against the Commission's power
to adopt the Rules. Part 1.2 contains comments for the Commission to consider in
addressing electric utilities' obligations to serve customers in a competitive environment.
PART 2: RATES AND RATEMAKING
This part identifies legal issues relating to cost allocation and confidentiality of
information under competition.
PART 3: STRANDED COST RECOVERY
This part identifies the issues to be decided in a stranded cost proceeding. It also
identifies standards in the Rules that certain Affected Utilities have challenged as
unreasonably vague. This part identifies legal arguments that may affect stranded cost
recovery mechanisms and stranded cost "true up" proceedings.
PART 4: ACC POWERSIPROCEDURES
This part identifies procedural issues that the Commission may face with respect to
stranded costs, affiliated interests, non-public service corporations, antitrust,
intergovernmental agreements, in-state reciprocity, and resource planning.
PART 5: NON-PSCs
This part discusses the various entities that operate as public service corporations
outside the Commission's jurisdiction. The part discusses the laws that affect the
relationships between these entities and public service corporations.
PART 6: FERC ISSUES
This part identifies the exclusive powers of the Federal Energy Regulatory
Commission ("FERC") and the Arizona Corporation Commission. It identifies initiatives
involving competition that may require FERC approval, such as establishment of an
independent service organization ("ISO"). This part discusses the factors that may
determine the jurisdictional separation of distribution and transmission.
PART 7: FEDERAL ISSUES
This part explains tax-exempt financing under the "Two-County" rule. This part
explains how FERC has addressed this rule with respect to open access for transmission
services. This part discuss the potential effect of the Rural Electrification Act's upon
electric cooperatives in a competitive environment. This part discusses what Arizona may
require of out-of-state entities under the Commerce Clause of the U.S. Constitution.
PART 8: ANTI-TRUST ISSUES
This part explains why utilities will not have state-action immunity from anti-trust
laws to the extent the utilities provide competitive services.
PART 9: SUGGESTED CODE CHANGES
This part identifies the arguments for and against the need for legislative changes
to facilitate competition. It identifies the state statutes that the group discussed.
REPORT OF THE ARIZONA CORPORATION COMMISSION'S
LEGAL ISSUES WORKING GROUP
The Arizona Corporation Commission ("Commission*) es~ablishedth e Legal Issues
Working Group (the "Working Group") pursuant to A.A.C. R14-2-1616 to identify, analyze
and provide recommendations to the Commission on legal issues relevant to Title 14,
Chapter 2, Article 16 of the Arizona Administrative Code (the "Rulesn). See A.A.C. R14-2-
1601 to -1 6 16, "Retail Electric Competition." This report ("Reportn) identifies and analyzes
legal issues which the Commission should consider in evaluating modifications or additions
to the Rules and relevant Arizona statutes.
This Report discusses regulatory policy regarding industry restructuring only to the
extent policy explains or defines a legal issue that is relevant to the Rules. This Report
does not recommend any policy over other policy choices that are available to the
Commission.
Tne working group considered a number of amendments to the existing Rules,
additional rulemaking as well as legislative and constitutional changes. Some participants
believed that any amendments to the Rules were unnecessary. The working group did not
reach unanimity for recommending any particular action. The working group's observations
regarding legal issues in the Report are contained in sections entitled 'Comment."
-.
I z e Repon refers to the Commission~s Legal Division as "Staff." References to
"A5zs:zd Utiiides" are intended to encompass the utilities defined in A.A.C. Rl A-2-1 601 (1 ).'
"ConsuneT1 refers primarily to potential high-volume purchasers of electric generation
services.
PART 4
SCOPE OF THE COMMISSION'S AUTHORITY
1.1 Whether the Commission may authorize "electric service providersJ' (as
defined in the Rules) to offer generation, billing and collection, metering and
meter-reading services and other information services on a competitive basis
in areas where such services were previously exclusively provided by
"Affected Utilities."
ANALYSIS
SCIMMARY OF ARGUMENTS REGARDING
AUTHORIN AND "REGULATORY COMPACT
Certain Affected Utilities have filed actions in the Maricopa County Superior Court,
alleging that the Commission does not have constitutional or statutory authority to adopt
the Rules.' These Affected Utilities maintain that the Arizona Constitution and the
Legislature, pursuant to its power under article XV, section 6, created a policy of "regulated
monopoly" for electric utilities. These arguments also rely on judicial decisions that refer
to Arizona's policy of "regulated monopolyn as being Legislative in origin or, alternatively,
the result of a regulatory contract.
1
Cornpan
may not
Two affected utilities, Morenci Water and Electric and Ajo Improvement
y, serve Morenci and Ajo. Refsrences to Affected Utilities throughout the report
reflect these utilities' positions.
2 Those cases are listed in the attached Exhibit "An to the Report. The
Residential Utility Consumer Office fiied an action to challenge the Rules and has
voluntarily dismissed the action.
Some Affes:ed Utilities mainrain that regulated monopoly for distribution and
generation results in a "reguiatory compacr" between utilities and the state. These Affected
Utilities maintain that their certificates of canvenience and necessity, aurhorized pursuant
to A.R.S. 9 40-281, grant the Affected Utilities exclusive righ~sto deliver electric service,
including generation and retail transmission, within their service territories.
Some participants maintain that competitive pricing unlawfully delegates to the
market the Commission's duty to determine just and fair rates based upon the "fair value"
of a public service corporation's assets. These utilities also maintain that the Rules violate
the Arizona Constitution, article XV, § 14, which requires the Commission to determine "fair
vaiuen of a utility's assets. Other participants maintain that competitive pricing is within the
Commission's constitutional powers to "prescribe just and reasonable classifications to be
used and just and reasonable rates and charges to be made and collected ..." by public
service corporations. Ariz. Const. art. XV, § 3.
Arguments in support of the Rules maintain that the State of Arizona has not
entered into a regulatory compact favoring perpetual monopolies. These participants cite
a decision of the Maricopa County Superior Court as denying a regulatory compact with
respect to a telecommunications PSC, U.S. West Communications, inc. v. Arizona
Coporation Commission, et al., Mar. Co. Sup. Ct. Cause No. CV95-14284 (May 6, 1997).
These participants maintain that no Arizona case expressly uses the term "regulatory
compact." These arguments maintain that Section 40-281 is intended to prevent
unnecessary duplication of lines and facilities within distribution areas; it does not address
competitive pricing of services, like generation, that are separabie from distribution
monopolies.
Panic:pants in support of the Rules maintain that, in a monopoly sett~ngf,a ir vaiue
is used to determine rates artificially, as if the rates were sei in a comperirive market. If
rates are based upon a competitive market, then the Commission's fair value determination
has been accomplished more directly and accurately than in the non-compeiiiive setting.
The Working Group's consensus is that the Coufis or perhaps rhe Legislature
ultimately will determine whether the Commission must have lecislative or constitutional
authority to promulgate the Rules, although some participants recommended that the
Commission should work with the Legislature to obtain authoriry to adopt and implement
the Rules. In the meantime, the Commission should clarify that the Rules do not affect the
exciusivity of distribution services under existing certificates of convenience and necessity.
The Rules should also distinguish between certificates for distribution monopolies and
certificates for other services that are unbundled or separated from distribution services.
ARGUMENTS BY AFFECTED LrTlL/T/ES
Affected Utilities maintain that the Arizona Supreme Court expressly recognized the
existence of a regulatory compact in Application of Tnco Electric Cooperative, Inc., 92 Ariz.
373, 377 P.2d 309, wherein the court stated:
By the issuance of a certificate of convenience and necessity
to a public service corporation the State in effect contracts that
if the certificate holder will make adequate investment and
render competent and adequate service, he may have the
privilege of a monopoly as against any other private utility.
92 Ariz. at 380-381 (emphasis added). See also City of Tucson v. Polar Water Co., 76
Ariz. 404, 265 P.2d 773 (1954) (CC&N recognized as a "contract" between the state and
utility); New England Coalition on Nuclear Pollution v. Nuclear Regulatory Comm'n, 727
F.2d 1127, 1130 (D.C. Cir. 1984) ("the very nature of government rate regulation" is "a
compac: whereby the utiiity surrenders its freedom to charge what the market wiil bear in
exchange for the state's assurance of adequate profits.").
These utilities maintain that "regulated monopoly" is Arizona's legislative policy for
regulating electric utilities. They maintain that this policy was created by, and therefore may
only be modified by, the Arizona Legislature, not the Commission. In support of this
position, the utilities cite cases such as Tonto Creek Estates v. Arizona Corporation
Commission, 177 Ariz. 49, 56, 864 Ariz. 1081, 1088 (Ct. App. 1993), which states that
"[tlhe concept of regulated monopoly arose from the Legislature in granting the
Commission authority to issue certificates of public convenience and necessity to public
service corporations."
The Utilities argue that Arizona courts have determined that the "contract" is one
creating a constitutionally protected "vested property rightn (Trico, 92 Ariz. at 381) and that
the Corporation Commission is under a duty to protect the exclusive right to serve
eiectriciry in the region where the utiiity renders service, under its certificate (Trico, 92 Ariz.
at 387). The court in Trico held as foliows:
We hold that the Corporation Commission was under a to
Trico to protect it in the exclusive right to serve electricity in the
region where it rendered service, under its certificate.
92 Ariz. at 387 (emphasis added). Twenty years later, the Arizona Supreme Court
strengthened and reiterated this view in James P. Paul Water Company v. Arizona
Corporation Commission, 137 Ariz. 426, 671 P.2d 404 (1 983). In that decision, the
Supreme Court reaffirmed the exclusive right to provide service under a CC&N, 137 Ariz.
at 429, and branded as clearly unlawful the Commission's attempt to certificate a
competitor promising lower rates:
. . . the Commission Icst sight of its obligation to respect Pauls
expectation, as a certificate holder, of an opportuniry to provide
service as needed.
137 Ariz. at 431.
Affected Utilities maintain that the elements of this reguiatory compact are long-standing,
clear and obvious. A public service corporation is required to serve those within
its territory, to make extensions and improvements to meet future demands, to subject
many of its business transactions to prior Commission approval and to limit its revenues
and income to those established by the C~mmission.I~n return, the utility is granted a
monopoly for exclusive service rights therein and the constitutional guarantee of just and
reasonable rates that allow it to recover its cost of service and earn a fair return on the fair
value of its properties. Electric public service corporations in this state have committed
billions of dollars of private capital to meet their collective obligations in reliance on this
compact. Cf United States v Wnstar Corp., 1 16 S.Ct. 2432 (1 996) (government
financlaily responsible to regulated business for economic injury suffered by change in
regulatory policy).
The Affected Utilities maintain that the history of the regulatory compact in America
has bean well chronicled. See, e.g.. Sidak and Spulber, 'Deregulatory Takings and Breach
of the Regulatory Contract." 71 NY-U. Law Review 851 (1996); George L. Priest, "The
Pursuant to A.R.S. 5 40-321, et seq., the Legislature purports to give the
Commission the authorrty to order a public service corporation to provide specified
services in an approved manner to customers within the utility's service area.
Moreover, A.A.C. R14-2-202(C) forbids a public service corporation from abandoning
service within its territory without express Commission approval. Thus, once a utility
becomes a regulated public service corporation, it apparently cannot out of the
business" without Commission approval.
I Origins of Utiiiry Regulation and the 'Theories of Regulation' Debate," 36 J.L.& Econ. 289
ARGUMENTS BY CONSUMERS AND STAFF I Potential consumers maintain that a certificate of convenience and necessiry does
I not provide, in eifect, that a public service corporation may "corner the market" on e!ectric
I service. Arizona court decisions refer to regulated monopoly a s a public policy, rather than
a s a contractual obligation. See Ariz. Corp. Comm'n v. Superior Court, 105 Ariz. 56, 59,
1 459 P.2d 489 (1969); Winslow Gas Co. v. Southern Union Gas Co., 76 Ariz. 383, 385, 265
I P .2d 442, 443 (1 954); Pacific Greyhound Lines v. Sun Valley Bus Lines, Inc., 70 Ariz. 65,
71,216 P.2d 404,408 (1 950); Cotp Comm'n v. Pacific Greyhound Lines, 54 Ariz. 159, 177, 1 94 P.2d 4-43 (1939).4 Tne law does not recognize monopoiistic pricing as a vested property
I right. See Columbia Steel Casting v. Portland General Electric, 103 F.3d 1446 (9'"Cir.
I 1996); F. T.C. v. Ticor, 504 U.S. 621 (1992).
The Affected Utilities' interpretation of Section 40-281 also frustrates the
I Commission's authority, which is derived from the Arizona Constitution rather than from a
I legislative delegation. 'Where the Constitution has said that public service corporations
shall be governed by the Corporation Commission in a given respect, it is the last, the I highest, and controlling fundamental law as to that matter." State v. Tucson Gas, Electnt
I Light and Power Co., 15 Ariz. 294, 301, 138 P.781,784 (1914). In the event of a conflict
I between the Commission's constitutional authority and a state statute, the Constitution will
4 I The Legislature recently added Section 40-281 (D) to provide that Section
40-281 should not be construed as "granting or havina srantedn an exclusive franchise
or monopoly to any teiecommunications corporation. If Section 40-281 never granted
I exclusive rights to telecommunications companies, then it follows that the statute never
granted the rights to other pubiic sewice corporations.
prevail. Ehington v. Wright, 66 Ariz. 382, 394, 189 P.2d 209. 217 (1 908); Tucson Gas. 15
Ariz. at 301. 138 P. at 784; State ex re/ Corb~nv . Ariz. Corp. Commn, 174 Ariz. 21 6. 21 9,
848 P.2d 301, 304 (App. 1992).
The Commission's rate making power includes adoption of rules that prescribe the
classifications and methods that will be used to determine rates and charges. See
Consolidated Water Util. Ltd. v. Ariz. Corp. Comm'n, 178 Ariz. 478, 483-85, 875 P.2d at
137, 1 4 2 4 (App. 1994); Woods, 171 Ariz. at 294, 830 P.2d at 81 5; Ethington. 66 Ariz.
at 392, 189 P.2d at 216 (Commission's ''full and exclusive power" extends to "making rules,
regulations, and orders concerning such classifications, rates and charges by which public
service corporations are to be governed.. .. " (emphasis added)).
Some participants maintain that Arizona's Constitution prefers competiiion and
disfavors mon~polies.T~h ese participants cite a decision of the Maricopa County Superior
Court as denying a regulatory compact with respect to a telecommunications PSC, U.S.
West Communications, lnc. v. Arizona Corporation Commission, et a/., Mar. Co. Sup. Ct.
Cause No. CV95-14284 (May 6. 1997). The Rules follow this principle and apply traditional
rate regulation only to natural monopolies, such as companies that erect electric
distribution lines, to prevent harm to the public from monopolistic pricing. Services that
become separable from the natural monopoly, like electric generation, are eligible for
pricing in the competitive markei. The Commission's rate making function may change as
a particular service becomes less essential or integral to the public service performed by
Article XV, 5 15 provides, in pertinent part, that '[m]onopolies and trusts
shall never be allowed in this State ...."
the cDmpany. See Mountain States Tei. and Tei. Co. v. Ariz. Corp. Somm'n, 132 Ariz. 109:
1 16, 644 P.2d 263, 270 (App. 1982).
The changing nature of the electric industry has led one c o ut~o conclude that. while
vertically-integrated electric monopolies may have been toleraied in the past, future
generations should not be bound to a policy based upon the technological limitations of
another time. See Appeal of Pubiic Sen/ice of New Hampshire, 14 7 N. H. 1 3,676 A.2d 1 0 1 ,
104 (1 996). The same court, applying a state constitutional prohibirion against monopolies
similar to Arizona's, held that competition in electricity should be aiiirmed "with all doubt
resolved against the perpetuation of monopolies." id., 676 A.2d at 105. The New
Hampshirs coun upheld retail electric competition despite utilities' arguments that 80 years
of statutes and court decisions granted them exclusive franchises.
COMMENT
None.
1.2 Whether the Rules may require Affected Utilities to serve all customers as the
"provider of last resort" if Affected Utilities no longer have the exclusive right
to serve such customers?
ANALYSIS
A.A.C. R14-2-1606 provides that Affected Utilities will provide electric service
("Standard Offer Tariffs")to all customers within a class in their utility service areas until the
Commission has determined that (1) all consumers in the class have the opportunity to
purchase power on a competitive basis and (2) all stranded costs pertaining to that class
have been recovered. The Affected Utilities' obligation to supply electric generation will
cease when stranded costs are fully recovered and competitive pricing is fully available to
customers.
Affected Utilities maintain that A.A.C. R14-2-1606 requires incumbent urilities to
continue providing electric services to all customers within their utility servic, areas even
though they no longer possess the exclusive right to provide such services (e.g..
generation, billing and collection, meter-reading, etc.). This obligation to serve will not
terminate until some indefinite time in the future. The Affected Utilities maintain that no
other "electric service provider" has a similar obligation. Several utilities have claimed that
the traditional utiliry obligation to serve is legally dependent upon the concomitant exclusive
right to serve. See, e.g., James P. Paul Water Company and Tonto Creek Estates, supra.
Affected Utilities claim that the burden to plan for and serve (at regulated rates that do not
explicitly provide for the recovery of associated costs) these customers is inconsistent with
the free market regime envisioned by the Commission and unlawfully harms the Affected
Utility's competitive position.
Affected Utilities maintain that the Rules should not impose an obligation to serve
in situations where the exclusive right to serve no longer exists, or at least should establish
more definite criteria for terminating an affected distribution utility's obligation to supply
electric generation6 The Affected Utilities maintain that the Rules should explicitly provide
for full recovery of all costs incurred in meeting this obligation.
For example, the Commission could classify customers by the size of their load.
Customers purchasing 1 MW or greater could be classified so that the obligation to serve
6 The "opportunityn to participate in competitive pricing does not mean that
customers have actually availed themselves of the opportunity. The Rules probably
require that the opportunity be available in a meaningful way. The FCC dealt with a
similar issue in In the Matter of Application of Ameritech Michigan Pursuant to Section
277 of the Communications Act of 7934, as amended, to Provide In-Region, Inter LATA
Services in Michigan, CC Docket No. 97-137, Memorandum Opinion and Order
(Released August 19, 1997).
would cease when that customer is able to purchase generarion from anorher supplier. If
that customer returns to the affected distribution utility, the customer remains in the
competitive marketplace notwithstanding the customer's decision not to choose another
supplier. The obligation to provide competitive services may continue for customers
purchasing lesser amounts during the transition until all customers in each class have the
opportunity to receive competitive services such as generation.
The Commission could define the point at which all customers of a class have the
opportunity to participate in the competitive market by using some presumptive time
provisions. For example, customers of a class will presumptively have the opportunity to
participate at least by a certain date, such as January 1, 2003, as provided in A.A.C. R14-
2-1604(D). The Commission could extend the date upon a finding of extraordinary
circumstances, including the Affected Utility's failure or inability to make all its customers
available for competitive generation. The Working Group consensus is that clarification
would be appropriate.
At least one Affected Utility suggests that linking the obligation to serve to "full"
recovery of stranded costs might be too inflexible. This objection suggests that stranded
cost recovery might extend beyond the time that all customers have the opportunity to
purchase competitive power. Many participants maintain that the Commission should
consider addressing this possibility in amendments to the Rules. See R14-2-1606(A).
The working group found that the Commission may not regulate entities that are not
"public service corporationsn as defined in article XV, § 2 of the Arizona Constitution. See
Rural/Metro Cop. v. Arizona Corporation Commission, 129 Ariz. 1 16, 1 17, 629 P.2d 83,
84 (1981).
COMMENT
A. The Commission may consider clarifying the point at which all
customers of a class have the opportunity to participate in the
competitive market.
B. The Commission may address whether the obligation to serve should
be linked to stranded cost recovery that extends well beyond the point
at which all customers of a class have the opportunity to participate in
the competitive market.
C. The Commission may explicitly state in the Rules that the reasonable
costs of meeting the obligation to serve will be recoverable in rates.
D. The Commission may not regulate corporations that do not conduct
activities described in article XV, § 2, Arizona Constitution.
1.3 Whether the Commission may lawfully compel Affected Utilities to make their
distribution and other facilities available to competitors on demand.
See the analysis and comments contained in Section I .I
The Rules contemplate that electric service providers (particularly generators) who
desire to sell to customers within the existing certificated areas of electric utilities will have
access to the distribution facilities of the Affected Utilities subject to terms and conditions
and rates to be established by the Commission. Several of the utilities have argued that
this provision represents an unlawful "taking" of a private utility's property (see Loretto v.
Teleprompter Manhattan C A N Corp., 450 U.S. 419, 102 S.Ct. 3164, 73 L.Ed. 2d 868
(1 982); GTE Northwest, Inc. v. Public Utility Cornmission of Oregon, 321 Or. 458, 900 P.2d
495 (1995)) that is not authorized by any specific Arizona constitutional or statutory
provision.
The Commission Staff maintains (1) the Affected Utilities will be compensated for
access to their distribution lines and for the power produced through their generation
plants; (2) a regulatory taking has not occurred since the Affected Utilities will continue to
use of their property, albeit under competition; and (3) a monopoly is not a property interest
under the Takings Clause of the state or federal constitutions, see Tennessee Electn'c
Power Co. v. Tennessee Valley Authorify, 306 U.S. 1 18, 141 (1 939); Law Motor Freight.
Inc. v. Civil Aeronautics B'd, 364 F.2d 139, 144 (1st Cir. 1966) ( "[Flreedom from
competition is not constitutionally protected.").
Some participants maintain that A.R.S. § 40-331 and/or A.R.S. § 40-332 authorize
the Commission to compel Affected Utilities to "wheel" power from other sellers of
generation to customers capable of being served from existing distribution facilities, upon
a determination that the "public convenience and necessity." These participants cite to
article XV, § 10, which provides that "[all1 electric, transmission ... corporations, for the
transportation of electricity, ... for profit, are declared to be common carriers and subject to
control by law."
Working Group members disagree as to whether A.R.S. 3 40-331 and/or A.R.S.
§ 40-332 apply only to circumstances in which an Electric Service Provider ("ESP A") seeks
to use the facilities of an Affected Utility ("Affected Utility B") in order to serve ESP A's own
customers outside of Affected Utility B's traditional service area. The Affected Utilities
maintain that the statutes do not permit ESP A to use Affected Utility B's facilities to directly
compete for Affected Utility B's customers. The participants also disagree as to whether
these statutory provisions authorize the use of an Affected Utility's facilities by non-public
service corporations that are not and can not be regulated by the Commission.
COMMENT
None.
1.4 Whether the Commission may regulate entities as "Eiectric Service
ProvidersJ' under the Rules that are not defined as "public service
corporationsJ' under the Arizona Constitution.
ANALYSIS
The Rules regulate as an "electric service provider," any "company supplying,
marketing, or brokering at retail any of the services described in R14-2-1605 or R14-2-
1606." A.A.C R14-2-1601(V). The Arizona Constitution allows the Commission to regulate
"public service corporations" which are defined, in relevant part, as "[all1 corporations other
than municipal engaged in furnishing.. . electricity for light, fuel, or power. ..." Ariz. Const.
article 15, 9 2. As the Commission moves toward competitive pricing, it may classify certain
services as less essential to a public service. The Commission may eventually classify
services or "electric service providers" as being outside the Commission's regulatory
authority. See analysis in Part 1 . l . See also, Rural/Metro Corp. v. Arizona Corporation
Commission, 129 Ariz. 116, 117, 629 P.2d 83, 84 (1981) (ACC may not regulate entities
that are not "public service corporations" under article XV, 3 2 of the Arizona Constitution.)
COMMENT
None.
1.5 Whether the Commission may streamline procedures for complying with
statutes that regulate public service corporations.
ANALYSIS
The Rules provide that "electric service providersn may offer competitive generation
and other services under less stringent rate procedures than for Affected Utilities that
provide exclusive services in their existing territories. For example, rates for competitive
generation service are deemed to be just and reasonable to the extent they are "market
determined." See, e.g., R14-2-1612(A). Elec:ric service providers file a tariff for each
service that sets the maximum rate and tens anti conditions that will apply. A.A.C. R14-2-
Certain Affected Utilities maintain that the Rules should require an electric service
provider for competitive generation to follow the established Commission procedures for
rate filings and rate changes, including the extensive cost of service, financial and other
information required by A.A.C. R14-2-103. These arguments maintain that the
Constitution's fair value provisions mandate such procedures for all services, including
competitively priced services. Section 1 .I summarizes the "pro" and "con" arguments on
this position
Some Affected Utilities maintain that legislative changes should be made to
streamline procedures in at least the following areas: confidentiality of utility information
on file with the Commission (e.g., A.R.S. §§ 40-204 and 40-367), existing provisions
regarding rate filings and tariffs (e.g., A.R.S. §§ 40-248, 40-250,40-361, 40-365, 40-367),
standards relating to rate discrimination and preferences (e-g., A.R.S. §§ 40-334, 40-374),
requirements for Commission approval for financings and sale of assets (e.g., A.R.S. $9
40-285, 40-301, et seq.), annual reports, etc.
Certain participants also maintain that the Commission should modify existing rules,
particularly to the affiliated interest rules (A.A.C. R14-2-801, et seq.), the resource planning
rules (A.A.C. R14-2-701, et seq.), the depreciation and rate filing rules (A.A.C. R14-2-102
and 103), and the customer service rules for electric utilities (A.A.C. R14-2-201, et seq.).
Staff and consumers maintain that the Commission may exercise its ratemaking
powers and streamline procedures to facilitate competitive pricing. This includes
streamlining procedures for utilities to comply with statutes governing public service
corporations.
COMMENT
None.
PART 2
RATES AND RATE MAKING
2.1 Cost Allocation and Separation Issues.
ANALYSIS
In the interest of leveling the playing field between non-regulated utility activities and
small businesses, some participants suggested that the rules should (1) preclude utilities
from cross-subsidizing their unregulated activities with funds received from ratepayers
under Commission authorized rates; (2) establish accounting procedures and standards
to prevent cross-subsidization by requiring the utilities to assign direct and indirect costs
to the unregulated activities; and (3) require the unregulated activities to pay fair market
value for the use of utility personnel, services, and equipment and to pay royalties for any
intangible benefit gained through affiliation with the utility.
Some participants maintain that the existence of cross-subsidization would suggest
that regulated rates are too high. The Commission could address cross-subsidization
through orders to show cause. The consensus of the group is that the Commission has
sufficient power to deal with cross-subsidization through rate making orders. These
participants did not see a need to change the Rules at this time.
COMMENT
None.
I:UOAN\WPGOVINDnWRKGRUPl.R P3
2.2 Confidentiality.
ANALYSIS
A participant suggests that A.R.S. § 38-431.02, Notice of meetings, be amended to
provide that documents and other information related to a public body's discussions or
consultations on negotiations, bids, or proposals for power and energy transactions, for
the purchase or sale of fuel, or for the construction, ownership, or operation of generation
or transmission facilities would not be public records, except that any contracts executed
by the public body would be public records unless otherwise exempted by law
The commenter also suggests amending A.R.S. § 40-204 to provide that information
related to negotiations, bids, or proposals for power and energy transactions, for the
purchase or sale of fuel, or for the construction, ownership, or operation of generation or
transmission facilities would not be open to public inspection, unless ordered by the
Commission for good cause shown.
The Working Group generally agreed that confidentiality procedures will have to be
scrutinized at some time. The Working Group sharply disagreed over whether such a
review should take place before or after competition commences.
COMMENT
The working group did not reach a consensus regarding what information
should be confidential, although the group agreed that some confidentiality
should be given to information that the Commission requires to be filed for
regulatory purposes. In that regard, the Commission may provide by rule that
commercially sensitivelproprietary information would be kept confidential
unless, upon notice to the utility that would be affected by disclosure,
extraordinary circumstances justify disclosure.
PART 3
STRANDED COST RECOVERY
3.1 The legal procedures (hearing andlor utility filings) necessary to determine
Affected Utilities stranded costs; legal procedures necessary to vary the
annual level of stranded cost recovery, change the total amount of stranded
cost recovery or change the mechanism by which stranded costs are
recovered.
ANALYSIS
If a utility claims stranded cost recovery in conjunction with a rate case, the issue
would be subject to the same general filing and/or hearing requirements attending other
claimed costs. Similarly, the legal procedures associated with changes to total amounts of
stranded costs, annual levels of recovery or mechanisms by which stranded costs are
recovered may be subject to the same limitations as recovery of other costs in a rate case.
If the Commission establishes a stranded cost recovery mechanism, subsequent changes
to the recovery balance or other details of the plan may be resolved in an abbreviated
proceeding similar to fuel or other adjustment clause mechanisms. See, e.g., Scafes v.
ACC, 118 Ariz. 531, 578 P.2d 612, appeal after remand, 124 Ariz. 73, 601 P.2d 1357
(1978). See also, A.A.C. R 14-2-1607(L).
The elements of proof for stranded cost recovery under the Rules would be
generally as follows:
A. Prove the value of jurisdictional asset or obligation which was:
1. prudent,
ii. acquired or entered into' prior to adoption of the Rules under the
traditional regulation of Affected Utilities.
B. Prove that the market value of the asset or obligation
I. decreased.
ii. as a direct consequence of competition.
C. Prove that the utility mitigated the stranded cost by every reasonable
measure related to the provision of regulated electric sewice which was
I. feasible, and
11. cost-effective.
The burden of proof with respect to "prudence" may, in many cases, already have
been addressed in prior Commission proceedings. Moreover, many of the costs that would
fit within the stranded cost category for Affected Utilities have been (a) explicitly approved
by the Commission, in some cases after expensive prudence reviews8, (b) subject to
review and not challenged by parties in previous rate cases, or (c) required by federal law
or Commission order. Most Working Group participants agreed it would be unnecessary
and unduly expensive and time-consuming to require a utility to "re-litigate" issues
previously reviewed and/or resolved by the Commission. In addition to the presumption
I of prudence, the Commission may employ traditional principles of res judicata, stare
decisis, and regulatory estoppel to prevent unwarranted re-litigation of previously decided
matters. The Working Group's consensus is that the Commission may review prior
I 7 "Acquiredn includes duties existing under law as of the date the Rules
were adopted.
I 8 One participant noted, as an example, that the prudence review of the
planning and construction of the Palo Verde Nuclear Generating Station cost
I approximately $40 million. The result of that review was reflected in a rate settlement
agreement approved by the Commission in Decision No. 57649 (December 6, 1991).
prudence aetermlnatlons that were materially Influenced by extraordinary circumstances.
such as fraud or concealment.
The Commission's regulations provide that "all investments shall be presumed to
have been prudently made, and such presumptions may be set aside only by clear and
convincing evidence that such investments were imprudent, when viewed in the light of all
relevant conditions known or which in the exercise of reasonable judgment should have
been known. at the time such investments were made." See A.A.C. R14-2-103(A)(3)(1).
Certain Affected Utilities believe the standard for utility "mitigationn measures in the
Rules is unlawful, unreasonable, and overly vague. The utilities maintain that the Rules
may be interpreted as allowing the Commission to require utilities to expend potentially
unlimited amounts of private capital and other resources to pursue illdefined business
ventures outside ACC jurisdiction. Other participants comment that Affected Utilities should
be required to use any revenues that are generated by or from the use of personnel,
assets or the credit of the utility to mitigate stranded costs. These participants maintain that
ratepayers should receive the benefit of revenues generated by the regulatory assets,
personnel or credit of the utility.
The consensus of the Working Group is that the Commission may inquire as to the
efforts that utilities have undertaken to reasonably mitigate stranded costs through cost
reductions, efficiency improvements, market expansion and/or the development of new
products and services related to the provision of traditional utility service. Staff suggests
that the Commission may clarify the level of mitigation that is 'reasonablen by borrowing
mitigation concepts from another body of law, like commercial lease law or public
condemnation law.
COMMENT
A. The Commission may accept prior prudence determinations as binding
for stranded cost proceedings absent extraordinary circumstances,
such as fraud or concealment.
B. Although some participants believe no change to the stranded cost
recovery provisions is required, most participants agree that the
Commission should clarify the mitigation standard in the Rules to
define "reasonable" mitigation efforts that reiate to the provision of
regulated utility service.
3.2 The legal standards relevant to stranded cost recovery mechanisms.
ANALYSIS
A.A.C. R14-2-1607(J) provides that stranded costs may only be recovered from
"customer purchases made in the competitive market." Participants disagreed whether
this provision means that stranded costs can only be recovered in the price for competitive
services. These arguments maintain that such a construction is inconsistent with A.A.C.
R14-2-1607(H). They maintain that "stranded costs" are, by definition, are costs that can
not be recovered in the competitive generation market. Participants disagree whether
A.A.C. R14-2-1607(J) conflicts with A.A.C. R14-2-1607(H).
The Working Group's consensus, with the exception of Consumers (who maintain
that the Rules are sufficient to determine stranded costs), is that the Commission should
more precisely define stranded cost recovery mechanisms. The Rules should be amended
to the extent the first sentence in R14-2-1607(J) may be read as limiting the classes of
customers or services that the Commission may designate for stranded cost recovery
COMMENT
See the discussion above.
3.3 The legal standards governing stranded cost recovery mechanisms (e.g.,
non-by passabie CTC or exit fee).
ANALYSIS
The Rules provide that customers who are not eligible to receive competitive
generation services do not, by definition, create "stranded costs" and therefore will not pay
a stranded cost fee. Further, the Rules do not allow stranded cost recovery from purchases
in non-competitive or monopolistic markets. These restrictions may require stranded costs
to be recovered through an exit fee or some other non-usage-sensitive mechanism. The
preferred mechanism for stranded cost recovery is outside the scope of the Working
Group's review. Depending upon the Commission's interpretation of R14-2-1607(J), certain
mechanisms may require amendment or waiver of the Rules
COMMENT
See the discussion in Section 3.2 above.
3.4 The ACC's powers to "true-up" any initial stranded cost estimates to eliminate
possible overlunder recovery of stranded cost amounts.
ANALYSIS
The consensus of the Working Group is that the ACC is not legally required to "true-up"
any reasonable initial stranded cost estimates any more than it is legally required to
true-up reasonable estimates of other costs used in setting rates. However, the
Commission may "true-up" stranded costs.
COMMENT
None.
3.5 Legal standards for "securitizing" or using public funding mechanisms for the
recovery of stranded costs.
ANALYSIS
The participants did not study the legal issues associated with "securitizing" or public
funding mechanisms for the recovery of stranded costs.
COMMENT
None.
3.6 Whether Arizona recognizes a "regulatory compact" as a binding contract that
affects the recovery of stranded costs or limits the ACC's power to amend
regulations affecting public service corporations.
ANALYSIS
This issue engendered considerable disagreement among the Working Group
participants. The arguments regarding a "regulatory compact" are discussed in Part 1 .l.
COMMENT
None.
3.7 Whether the ACC has awarded stranded cost recovery for
telecommunications providers or for gas LDC's in Arizona.
ANALYSIS
The Commission traditionally prescribes rates to avoid stranded costs for any public
service corporation, through rates charged to the utility's remaining customers (telephone)
or recoupment of lost sales margins in rates (gas) or by a combination of both. With
respect to gas LDCs, FERC Order No. 888-A. issued March 3, 1997 (starting at page 488,
et seq.), and the Commission's 1990 Decision No. 50575 contain stranded cost recovery
principles. FERC did not require a showing of prudence or mitigation and the ACC's
decision did not interfere with this pattern.
COMMENT
None.
PART 4
ACC POWERSIPROCEDURES
4.1 Stranded Cost Proceedings.
See the analysis in Part 3.1.
The nature of a stranded cost proceeding will depend, in part, on (1) the
methodology for determining the amount of recoverable stranded costs; (2) who will pay
the stranded cost; and (3) the recovery mechanism (i.e., a surcharge on all ratepayers to
be paid into a common fund, a meter charge, a rate surcharge, etc.).
Also, the Working Group's consensus is the Commission may implement automatic
adjustment clauses in appropriate contexts to allow stranded costs to be adjusted based
upon changed circumstances. Adjustment clauses have been approved in other contexts
in the past and would obviate the need for utilities to make supplemental applications to
the Commission to recoup their stranded costs. See, e.g., Scates v. ACC, 11 8 Ariz. 531,
578 P.2d 61 2, appeal after remand, 124 Ariz. 73,601 P.2d 1357 (App. 1978).
COMMENT
None. See comment to Part 3.1.
4.2 Affiliated Interest Rules.
The Commission's rules relating to public utility holding companies and "affiliated
interests" (See A.A.C. R14-2-801 through R14-2-806), apply to Class A investor-owned
utilities under the jurisdiction of the Commission. A.A.C. R14-2-802(A). Although most
utilities entering the competitive market will likely meet the definition of a "Class A investor-
I:UOAN\WP~OUIND~WRKGRU.PR~P 3 24
owned" utility, some entities seeking to enter the competitive market in Arizona may not be
Class A utilities. The Commission may revise the Rules to address the issues relating to
the affiliated interests of companies not failing within the scope of the Commission's
existing affiliated interest rules. The Commission's regulatory powers may be limited for
entities that are not public service corporations.
COMMENT
None.
4.3 Non-PSC's.
The Commission may regulate only a "public service corporation" ("PSC"a)s
defined in article 15, § 2 of the Arizona Constitution. The same provision expressly
excludes municipal entities from the Commission's jurisdiction. Some participants maintain
that intergovernmental agreements may be used to coordinate, but not regulate,
competitive pricing for non-public service corporations. Certain participants maintain that
the agreements may not allow the Commission to assert regulatory powers over such
entities.
Alternatively, other participants maintain that existing rules, statutes and the
Constitution must be amended to bring non-public service corporations, namely municipal
corporations, under the jurisdiction of the Commission, or some other independent agency.
For-profit subsidiaries of non-PSCs may be subject to the Commission's jurisdiction.
Some question exists whether the Commission may, in such instances, use its affiliated
interest rules to regulate the for-profit affiliate's transactions with the non-PSC. The
Commission regulates affiliated interest transactions of PSCs in A.A.C. R14-2-801 through
-806. The Commission's power to regulate affiliate transactions of a non-public service
corporation may be found in article 15, § 3 of the Arizona Consritution. which provides that
the Commission may require a public service corporation to report information about, and
obtain permission for transactions with, its parent. subsidiary, and other affiliated
corporations. See Arizona Corp. Comm'n v. State, 171 Ariz. 286, 830 P.2d 807 (1 992).
COMMENT
None.
4.3.1 Antitrust Principles.
Non-PSCs and PSCs will be subject to the traditional oversight of the
Federal Trade Commission ("FTCn) and other federal and state agencies in the area of
anti-competitive actions. The FTC is a law enforcement agency with statutory authority
over a variety of industries, including the electric power industry. The FTC enforces the
FTC Act (15 U.S.C. §§ 41-58) and the Clayton Act (15 U.S.C. ��§ 12-27) which prohibit,
among other things, "unfair methods of competition," "unfair or deceptive acts or practices,"
and mergers or acquisitions that may "substantially lessen competition or tend to create
a monopoly."
In some instances the federal antitrust law's definition of "person" or "parties"
embrace cities and municipalities, so that they will be subject to antitrust enforcement
actions. 17 McQuillin Municipal Corporations (3rd Ed. 1990) 534, citing Lafayette v.
Louisiana Power & Light Co., 431 U.S. 963, 98 S. Ct. 1123. Generally, whether actions
of a municipality violate the antitrust laws is a question of the extent to which the actions
taken are authorized or directed by the state pursuant to state policy. Id. Thus, the
Commission and the Courts may have jurisdiction over anti-competitive behavior affecting
PSCs. depending upon the activities undertaken and the nature of the entity which is the
perpetrator of the anti-competitive behavior.
COMMENT
None.
4.3.2 In-State Reciprocity.
The Rules address in-state reciprocity between non-PSCs and PSCs for
purposes of competition. A.A.C. 5 14-2-1611. Further, A.R.S. 5s 11-951 through 954
authorize the Commission and municipal subdivisions of this State to enter into
intergovernmental agreements ("IGAs") to jointly exercise any powers common to the
contracting powers. A.R.S. § 11-952(A). Some interested parties maintain that such IGAs
could be used to facilitate competition between PSCs and non-PSCs by controlling some
of the practices of the non-PSCs through contractual rather than regulatory means.
Some participants maintain that IGAs may not be used to limit the exercise
of an entity's regulatory power. Some participants believe that lGAs could permit
municipalities, or other "public agenciesw as defined in A.R.S. § 11-951 to enter into
agreements with the Commission so that the separate governmental agencies would agree
to exercise their individual powers in a parallel and consistent manner. However, none of
the participants addressed whether an Affected Utility, electric service provider, customer
or other person may enforce such an agreement. The proposed form of such an IGA was
not available for comment.
A.A.C. R14-2-1611 (E) provides as follows:
If an electric utility making a filing under R14-2-1611(D) is an
Arizona political subdivision or municipal corporation, then the
existing service territory of such electric utility shall be deemed
open to compet~tionif the political subdivision or municipality has
entered into an intergovernmental agreement with the Commission
that establishes nondiscriminatory terms and conditions for
Distribution Services and other Unbundled Services, provides a
procedure for complaints arising therefrom, and provides for
reciprocity with Affected Utilities.
An IGA would generally address the respective operations of the
Commission and the political subdivision or municipality, so that their efforts to establish
competition in electric generation are coordinated. An IGA would be based on the general
authority of A.R.S. § 11-952, and deal with the joint exercise of the parties or their
respective authorities to regulate electric operations within their respective jurisdictions.
Specifically, A.R.S. 9 11-952(A) provides:
If authorized by their legislative or other governing bodies, two or
more public agencies by direct contract or agreement may contract
for services or jointly exercise any powers common the contracting
parties and may enter into agreements with one another for joint or
cooperative action . . . .
Staff maintains that an IGA between two governmental entities to agree
to jointly exercise their respective authorities is authorized by A.R.S. §§ 11-951 through
11-954. An IGA will not be used to limit the exercise of an entity's regulatory power in the
public interest The IGA may "confirm that separate governmental entities will exercise
their powers in a parallel and consistent manner." Some participants cite, as an example,
the IGA entered into by the Commission with the Federal Power Commission that was
approved by the Arizona Supreme Court in Garvey v. Trew, 64 Ariz. 342, 170 P.2d 845
Staff maintains that the general provisions of an IGA "will consist of the
powers of the respective state political subdivisions and will explain how the political
I:UOAN\WPGOUINDWWRKGRUPl .RP3 28
subdiv~s~onwsii l coordinate the exercise of their respective political powers." One party
agrees w~thth e general scope of the agreement as descr~bedb y the Commission. Another
believes that the IGA should address whether there is "equal protection of the law for PSCs
and non-PSCs."
Another participant points out that an IGA will not create an independent
regulatory entity with jurisdiction to assure fair and equitable treatment of PSC's and
consumers' purchases in municipal corporations' territories.
Other participants maintain that the IGA statutes only permit public
agencies to exercise jointly held powers. Therefore, so the argument goes, the
Commission may only enter into lGAs with entities which have the same type of regulatory
powers as the Commission. This group of interested parties take the position that non-
PSCs do not have "joint power and authority" with the Commission; thus, no lGAs may be
entered into with such governmental non-PSCs. There appears to be no dispositive case
law in Arizona on the issue, although Gawey v. Trew, 64 Ariz. 342, 170 P.2d 845 (1 946)
and Op. Atty. Gen 184-135 shed some limited light on both sides of the issue. These
participants also maintain that the IGA may not be used to give the Commission power
over municipal corporations since it is specifically denied such power under article XV,
section 2 of the Arizona Constitution.
Some participants claim that the Commission has used lGAs in the past
when it agreed with the public utility commissions on some Indian reservations that the
Commission should set the rates for telephone service on the reservation, even though the
utility commission on the reservation had power to do so. In short, as with many of the
issues facing the Commission, there is no bright-line answer to the issue of how to deal
with the in-state reciproc~ty issues, but the lGAs may be a viable mechanism to facilitate
recrprocity, at least in part.
COMMENT
None.
4.4 Resource Planning Issues.
The Commission provides for resource planning and oversight. See A.C.C. R14-2-
701, et seq. The need for full, formal generation resource planning will likely decrease
once competition is implemented and fully underway. As with any competitive market,
supply and demand factors may provide optimum market efficiency, and an equilibrium will
be reached at some point in the future.
Resource planning ensures that the public is not left without adequate supply, even
for a short period of time. Historically, construction of generation and distribution facilities
required far-reaching resource planning. Advances in technology has progressively
reduced lead-time, thereby permitting quicker response to changes or shifts in demand.
Competitors want an adequate supply, as well as facilities, to meet the anticipated
demand. Competitors want their resource planning information to be confidential.
Resource planning is monitored by federal (such as FERC) and state (such as the I Commission) authorities. As competition commences, the Commission may consider
I additional rulemaking to deal with confidentiality concerns or to protect Arizona's public
from periodic shortages. Oversight may be provided by an independent system operator
as well as consumer organizations.
COMMENT
None.
PART 5
NON-PSC'S
5.1 Municipal Corporations, Non-PSCs witti Federal Interests.
ANALYSiS
\i,lithin Arizona. many different kinds oi "ncn-PSCs" ocerate is e!ecrric uriiities.
-. I nese inc!uce ~nunicipal utilities (owned/opersi;c! by a city or tcwn), s!ectrical discricis,
iriigation districts. agricultural improvement districts and power districts. General gcverning
authority for the municipalities and the districts is found in Artic!e 13 of the Arizona
Constiiuticn, A.R.S. Title 48 (districts) and AA.SST. ile 9 (municipalities). Tribal utilities are
non-PSCs thst are not generally regarded as municipal corporations. Some non-PSCs
provide eiectric service within a defined and exclusive servic~ie ritory; others provide
electric service within the service territories of existing PSCs and other non-PSCs.
A variety of federal interests affect PSCs and non-PSCs. For example, cooperatives'
(PSCs) and municipal corporations' (non-PSCs) cantract for federal preference power; the
federal government has a considerable interest in Tribal activities; federal proprietary
interests exist for faciiities used by certain districts under federal rec!amation law; and the
federal government guarantees. funds or otherwise authorizes financing obligations of
certain PSCs, cooperatives and municipal corporations.
Two parties commented that federal interests might complicate Commission
jurisdictional issues and should be researched. Tine ACC Staff believes a federal interest
in a non-PSC does not preclude the non-PSCJs abiliv to offsr a competitive generation
supply.
COMMENT
5.2 Relations Between Non-PSC's and PSC's.
ANALYSIS
Scne carticipants maintain that the new Ruies aiiow born non-?SCs and FSCs to
provide csmpeiitive generation (but not distributicn) s e n ~ i c sto cus:omers within 2ach
other's se-ice tenitones, subject to certain cor;diiions. One commenter believes the Rules
do not ailow such competition. In the czntext of non-PSC, cmtain statutes were identified
by parties as potentially restricting the authority of PSCs and non-PSCs to compete with
sach other. No participant identified any Arizona law that would preclude non-PSCs from
providing access to their distribution systems and s e w i c area customers. (One
commenter cited A.R.S. 3 9-516 as preventing the Commission from granting CC&Ns over
a rnuniciptlity's service area under czrtain circumstances.) Another participant maintained
that the Commission can authorize PSCs to provide competitive generation to customers
in non-PSC territories. Four parties pointed out that Arizona law does not require non-
P SCs to provide access to their distribution facilities.
Three parties raised issues relating to the impact of Title 9 on the ability of the
Commission to authorize competition among PSCs and non-PSCs. One of these parties
asserts that A.R.S. 5 9-516 prohibits the Commission from authorizing a PSC to compete
with 'municipal corporation^.^ However, by its express terms, A.R.S. 5 9-516 is applicable
only to cfies and towns, not the iull panoply of municipal corporctions or other non-PSCs.
A second cammenter believes Title 9 gives cities and ~ O W i~hSe exc!usive right to provide
electricity within their boundaries. Severs1 commenting parties believe A.R.S. 3 9-516
mccses a ;cncemnaricn ~equirsmenrg n i:.r.i. es and fcwns in crcsr for i e m :o compere
!,viri; PSC3 Ccmmission SiaW C,e!ieves this siaiure does nci iequire such concemnzrion ic
.. . cCer "czmceriiive generaticn supply."
C re ;sry iceniified A.3.S. 68-1 5 1 5 and 'simiiar s;~iures" as possibly heving i f i
i n ti-ccm c er!tive e?ec: an csriain special taxing districts (non-?SCs) if improped!~ c ~ n s t r u e d
a s resii-ic:irc expansion of an existing district, rarher than limiting creation a i new districts.
A. R.S. 43-7 75; aiso may limit an e!ectric district to se!ling only surpius energy outside
its servicz- zrea.
--.
I i!e 40 (reiating to PSCs generally). Title 10 (relating to PSC cooperatives) and
iranchisinc siatutes were raised by various parries as limitations an the genewi ability of
PSCs to c z n c e t e with each other, as well as with non-PSCs. The impact of these statutes
is more fclly addressed in Section 12 of this report.
COMMENT
Ncne.
PART 6
FERC ISSUES
6.1 ACC's Exclusive Jurisdiction.
6.1 .I in view of FERC Orders 888, 888-A, 889,889-A, FERC decisions, case
law, the U.S. Constitution and the various Federal acts, what
exclusive (or concurrent) jurisdiction may the ACC exercise in the
context of competitive electric energy services, whether in wholesale
andlor retail transactions considering the interstate nature of the
transmission lines?
ANALYSIS
FE3C's jurisiidion is limited by iis snaciinc :zwa rc c l y ir;c:ubcs z~clicu iiiiiiss.
It nas incirzc: jurisdicrion over Lransinitting utiiiiiis i k i ~ ~ ccshn piainrs which -i.ay be
brcucnr jursuant to 521 1 of& iedewi Power Ac:. It has 70 jurisdic~ion ever xunic:cais.
FMA's cr RUS borrowers who were brought inro apen access cnly throuci; i-tciprocii'j
C3flCSDiS.
-I. ne Energy Policy Act of 1992 forbids FERC from ordering "rstaii whee!ing" or direct
access to power supply by retaii customers, leavino such orders io :he states' discretion.
See 16 U.S.C.5 824k(h). FERC has affirmed that it is a stats decision to permit or require
retail wnee!ing and has left it to state regdatory authorities to desl with any stranded casts
or stranded benefits occasioned by retail wheeling on facilities or servic~su sed in local
distribution. (62 FR 12274,12408). Further, in 888-A FERC darified that "states have the
authority to determine the retail marketing areas of the e!ectric utilities within their
respective jurisdictions" along with the authoriry to determine the end user services those
utilities provide. (62 FR 12274, 12279).
Additionally, exc!usive jurisdiction has been resewed to the states (and therefore
the ACC) over the following matters: the provision and pricing of retail sales of electric
energy (as opposed to unbundled transmission) and the siting of transmission and
distribution lines. While states retain jurisdiction over local distribution lines, FERC claims
to be the final arbiter of their definition (see discussion in S8.S below).
FERC and state commissions each have jurisdiction over separate aspects of a
retail wheeling transaction: FERC has jurisdiction over rates, terms and conditions of
unbundled retail transmission in interstate cornmerc by public utilities wnile state
~fi -u mmissicnsh ~ vjeur is$ic:icn cver local C~S~TICL:i:tCcTii.i ties. the rares icr a i r i i c ~ uss ing
:hose fac:iiiies :o maki a re:zii sale. and ihe S ~ F / ! C Zif oiivenng $!ex-c ezersy to end
users (62 3 :2 27A. 7 2279.7 2372) even if ~ h e r za re no identiiable iocal disiriburion
fsciiiiies. Thus. In ail cases, syses have the r n e t r s ro ensiirs k a r cusnmers co not avoid
iheir iespcnsibiiiry for stranded costs or benefiis.
Nevertheiess. FERC has funher indicated in 888-,A (and the Federal Power Act
supports such interpretation) that FERC and a s~zicha ve cancurrent junsdic:ion to order
stranded cost recovery when retail customers obtain retaii whee!ing in intestate csmmerce
from public utiiities in order to reach a difierent generation supplier.
If the stzte regulatory authority is not authorized to order stranded cost recavery for
direct retail accEss, FERC may permit a utility to seek a customer-specific surcharge to be
added to an unbundled transmission rate. (Order 888, FERC Stats. & Regs. at 31,824-26;
and 18 C.F.R. 35.25). FERC will not interfere if the state agency has such authority and
has, in fact, addressed such costs, regardless of wnether i t has allowed full, partial or no
recovery.
FERC will be the primary forum for recovery of stranded costs caused by 'retail-turned-
wholesale" customers, such as the creation of a municipal utiiity system to purchase
wholesale power on behalf of retail customers who were formerfy bundled customers of the
historical utiiity power supplier (e.g., by annexing retail customers of anorher service
territory). 18 C.F.R. 35.26. FERC will not intercede in every instance of municipalization,
but only in cases where the new wholesale entity usse FFERC-mandated tnnsmission
access to obtain a new power supply on behalf of reizil customers that were formerly
supplied power by the utility.
iciiicnaily. FERC in 288-A cezzs iiansmlssicn iine sitins as a siaie-exc:usi\~e
7ir;c:icn 3rd wiil nor interfere in a stzie's d e ~ : s i ~2nnd jurisdic:;cn cvi: ILCZ, i. ssues. ~--7E X C
wiil ncr e.ic:ozch on ihe following areas: siate suthoriry over lcctl seriice issues icciucinc
re!i&iiity cci octl ssnic,~a;d ministration of intezwt~d-~esourcc~s arnirga nd uiiiiD/ buy-S~CE
and decand-side decisions, including DSM: authct-iv over utility ,-z orera3on and izsourc
pcCciics: generation siting; and suthonv to impose non-by ~asszcicei stributicn or wrail
stranded COS~c harges along with charges for social or environmenral qrcsrarns. (Order 588
and 18 C.F.R. 35.27)
COMMENT
None.
6.2 FERC's Exclusive Jurisdiction.
6.2.1 In view of Rules 888,888-A, 889,889-A FERC decisions, case law, the
U.S. Constitution and the various Federal acts, what exclusive (or
concurrent) jurisdiction may FERC exercise in the context of
competitive electric energy services, whether in wholesale andlor
retail transactions within Arizona considering the interstate nature of
the transmission lines?
ANALYSIS
FERC appears to have staked out exclusive jurisdiction in unbundled state retail
transactions and requires utilities to implement any state retail access experiments under
the Order 888 pro forma wholesale tariffs. Where specific provisions arz inapplicable for
service to unbundled retail costomers, e.g, filing of individuzl servic agreements and
requirements for customer deposits, public utilities must seek a waiver of those tariff
provisions. (New England Power Company, et al., 75 F.E.R.C. P5-t ,OG8 (19C6).
-- --- - , -. ,Pi !--cic,-eu+.-~ ' am raii Iransmission tar16s 4ieC: Jy 3zciizc Zene~z'lE ~c:~I;c : i; m-cpc7 . 9 )
2nd :/\/as;ingron 'Narer Pgwer {"'NPP") to imciemenr :eraii .zcmee:iiicn experimenrs in
\!lashin~:cn. Idaho and Oregon. WFP's tariffs ?id been Z C C ~ C V Eb~y h e' A/zshingron 2nd
Idaho 3-L--~- L Zrs gulatory commissians and ?GE's were suknitec to Oreson's. i?owe\~er,
FERC ricted :ha1 no state authority had rec;ues;ed t-c7n7C acprcvai a i any of :he seoaraie
retaii iariEs cr variations from the 888 pro forrna %riff (to accsnmodate any special nesds
of a state rstaii access program) and so rejeced the tat-iffs lwiihout prejudice. FERC left
the door ocen to the state commissions for such requesn. instructing that the separate
retail tariff or variations from the pro forma tariff sought should stiil be consistent with
FERCJs open access and comparability principles.
WFO argued that the retail experiments did not constiiute unbundling within the
meaning of Order 888, becausa WPP had simply removed &e onergy component from its
current bundled retail tariff and inc!uded non prcductjon ccsts for transmission, distribution
and general expenses. FERC disagreed and found instead that the tariff inc!uded the
"separation of products that we have determined creates unbundled retail transmission of
power that is within our exclusive jurisdiction." Citing Order 888, FERC noted. 'When a
retail transaction is broken into two products that are sold separately,...we believe the
jurisdictional lines change ..... When a bundled retail szle is unbundled and becomes
separate transmission and power sales transactions, the rzsuiticg transmission transaction
fails within the Federal sphere of influence." Tne Washingon Water Power Compsny,
Docket No. ER97-960-000 (Issued Feb. 25, 1097); 78 F.E.R.C. P61,178; 1997 FERC
LEXIS 306.
. - - - n -is jrcccse- ;~:21i :Zriii. -SE had zsei :he pro icr-2 :arif? addirc s;;Ercea zzs;
recz~vez~nja rces, s i ~ / iacg~rie menrs and iccai cisiriburion crctiisions io i. Neiie';he!ess.
ii was wjsc:ed sinca the Or-~cn Cammission had not mado 2 s;ecific rSqEsSi :hai ?GE
. ..- b e ailcwei such variance from ~ hoepe n accrss canplianc :arm.
,c -c-n C uses PGE to explain ihat acsent FERC s;grcval of a s?ecii?c it~ie
canrnissicn re~uest. the open Eiccess tariff must be used for ail unbundled wiaii
transmission, inc!uding piioi or experimental prcgrarns. In such prosrams, state
commissions may ''determine the rates jurisdicfional to them by ostabiishinc a bundled
deiivery p n c ~(in cluding stranded costs) and then subtracting the utility's open access tariff
rates for transmission and ancillary servic3s." Foriiand General Electric Compsny, Docket
No. ER97-1112-000 (issued Fvlarch 3. 1997); 78 F.E.R.C. P51,219; 1997 .=,, =IIC LEXlS
579.
FERC casts ubuy-selin transactions in a similar jurisdicticnal model. Whers "an end
user arranses for the purchase of generation tom a third pafif supplier and a public utiliiy
transmits that energy in interstate commerce and resells it as part of a 'nominal' bundled
retail sale to the end user." FERC says the retail sale is actually the functional equivalent
of two unbundled sales (one transmission. and the other the sale of power) and that FERC
has exclusive jurisdiction over the transmission component. FERC has acknowledged that
in such a transaction there would also be an element of local distribution which would be
subject to local jurisdiction. (Fed. Reg. Vol. 61, No. 92, p. 21,620).
FERC will also assert exclusive jurisdiction in a holding company or other mupLIa -s tate
situation where a state regulaiov agency decision, 2.g. on stranded cost recovev, could
In short. FE2C claims that 'msrters c i inrers~ate csnmercs. inciucicc :-e vss;
. . iniegrarec e!edric system that sucply the nzticn's industrizi. csmmerc:ai acc ~esiceniial
cusmrners ars the responsibility of [he Federal governmenr." (Siarernenr bv =-,.: ~zace?hA .
klcler. Char. FERC. before the Enersy and Narurzl Rssourcss Committee. Unirec States
Senate, March 30.1097.) As made clear by FEXC Orders 888 and 888-A. 889 SEC 889-A.
this inciudes all transmission transactions, coordination serrices and agreements,
independent system operators, regional power pools, and power exchanges.
COMMENT
None.
6.3 FERC Approvals.
6.3.1 What actions taken in Arizona or involving Arizona public utilities to
move to retail competition in the electric industry (including any
formation of an ISO) will require FERC approvals and what criteria
wiil FERC apply?
ANALYSIS
The majority of the current rules will not require FERC approval. A c-" rnmenter
indicated that FERC cooperation would only be needed in de!ineation of transmission and
distribution lines and perhaps for stranded costs imposition. Hov~everF, ERC's very r e c n t
decisions in PGEand WP, as discussed in 58.2.7 above, provide that the ACC and public
utilities must. in confomlance wiih those decisions, detail and seek FERC pre-zpproval of
all unbundled retail tariffs that deviate in any way from the Order 888 open access
compliance tariffs filed, including those which add stranded cost recovery charges,
:~s;i-~ccacrz narces. i3FJlCS agreemenrs. ?Ti. --2 ~"sr :he 1CC arc zuolic 3i:ili:e. 1LiSi
zraoose 12ek accrcval ~i :he ae!inearicn 5 r:znsmlssicn arc zls:ricbrlcn i n i s as
ciseussea 3e!cw.
Addiiicnally. any proposal for IS0 crearicn (wnether srzre cr ?eficnal), wisvznr IS3
srocadures (inc!uding transfer of operational controi of FEZC jurislictionzi fzc:iiiias).
iransinissicn pricing, a c c s s f ees.t ariiis, expansicn. or eniorcernenr . ~ ~ iai lls o requirr i-7c-3 C
pre-approval. Pacific Gas and Electric Compeny, ei al., Docket Nos. EC96-19-000 and
ER96-1663-000(I ssued November 26, 1996).
In Orders 888 and 8884. FERC has issued specific guidance for fomaticn of an
IS0 whicn apply& v if the /SO is also a control area operator. -I. n e s c FERC principles
include:
The ISO's governance should be structured in a fair and nondiscriminator/
manner.
2. An IS0 and its employees should have no financial interest in the economic
performance of any power market participant. An IS0 should a d o p t a n d
enforce strict conflict of interest standards.
3. An IS0 should provide open access to the transmission system and all
sewices under its controi at non-pancaked rates pursuant to a single,
unbundled, grid-wide tariff that applies to all elicible users in a non-discriminatory
manner.
4. An IS0 should have the primary responsibility in ensuring short-term
reliabiiity of grid operations. Its role in this responsibiiity should be well-defined
and comply with applicable standards set by NERC and ihe regional
reliability council.
5. An IS0 should have control over the operation of interconnected
transmission facilities within its region.
6. An IS0 should identify canstraints on the system and be able to take
operational actions to relieve those constraints within the trading rules
ss:ar~isnec sv :ne governlnc ~ C C VT hese iuies si;oula aromcre e.-i -lc :enr -..- c-s wlnc.
- , -:ye !SO should have approprlare :ncsntives for s5c:ent manacernent and
acninistration and should grccare h a se~iiczs needed fcr such
n a n a s e m e n i and adrninis~raticn in an cpen corncetitive market.
8. An !SO'S transmission and anciilary sewicss pricing policies shcuid prornoie
h e efficient us2 of and investment in generarion, transmission, and
csnsurnprion. An IS0 or an RTG c i which the ISO is a inemcer should
ccnduc: such studies as may be necessav to idenriQ ooprationai problems
or appropriate expansions.
5. An IS0 should make transmission system information public!y available on
a timely basis via an electronic information network consistent with the
Ccmmission's requirements.
10. An IS0 should develop mechanisms to coordinate with neighboring control
arz-as .
11. An IS0 should establish an ADR process to resolve disputes in the first
instance.
FERC h a s not issued specific guidance for non-control area operator ISOJs.
Presumably, their hallmark would be independence wfth r e s ~ e c tto governance and
financial interests to ensure that the IS0 is independent and would not favor any class of
transmission users.9
FERC d o e s not require ISO's. In Rule 888-A, FERC said it does not believe it
'appropriate to require pubiic utilities or power pool to establish ISOJs, preferring instead
to allow time for functional unbundling to remedy undue disc;inination.*
In an order on the proposed PJM IS0 FERC stated: The principle of
independence is the bedrock upon which the IS0 must be built if stakeholders are to
have confidence that it will function in a manner consistent with this Commission's pro-competitive
goals." Order 888-A. FN219, citing Adsntic City Eieciric Compsny, ei a/.,
77 F.E.R.C. P61,148 (1996).
COMMENT
6.4 Jurisdictional Separation of Distribution-Transmission Lines.
6.d.l The FERC has issued criteria and decisions to a s s i s t in determining
what is a distribution line and what is a transmission line so a s to
assert appropriate FERC jurisdiction over transmission lines. What
are the criteria, how should they be applied. and what FEXC actions
are required to confirm that de~ermination?
The answer is unciear. FERC reczcnized in Order No. 888 that oncz retaii
service was unbundled, there wculd be a need to craw a distincrion between facilities used
for transmission and those used b r l ocal distribuii~ns'~o as to leave states with authority
over the servica of de!ivering e!ectric energy to er,d users. Toward that end, FERC has
adopted a case-by-case methodology in delineating between "transmission" and
"distribution" facilities regulated by FERC and those left to the States. FERC has not
established a 'bright linen test. Guidanca wiil develop as FERC issues decisions.
Order 888 requires public utilities to consult with state regulatory agencies
before filing any transmission distribution c!assifications andlor cost allocations (for such
faciiities to be included in rates) with FERC. If those ciassifications and/or cost allocations
have state regulatory support, if the state regulators have specifically evaluated the seven
indicators and any other relevant facts, and if the state's recommendations are consistent
with the principles of Order 888, the Commission wiIl defer to them. FERC has said it
hopes to use this mechanism to take advantage of state regulatory authorities' knowledge
and expertise concerning the facilities of the utilities they regulate. (Order 888
Introduction/Sumrnary, Fed. Reg- Vol. 61, No. 92, P21541).
lo Washington Water Power Company, FN8.
I:UOANVNPSO\LINO~WRKGRUPI.R P3 42
to use in the svsluation procsss:
7 . L?ctl tiis:riburion hciiities are nomaily in c!osa proximiry io rsiaii
customers.
2. Local distribution hciiiiies are primariiy radizl in charac:er,
3. Power Rows into local dis;~buiion systems; ii rare!?, if 2ver: Rows out.
4. When power enters a iocal distribution syslem, it is not :ecansicned
or transported on to some other market.
5. Power entering a local distribution system is consumed in a
comparatively restricted gesgraphical area.
6. Meters are based at the transmissionllocai distribution i n t e ~ a cto
measure flows into the local distribution system.
7. Local distribution systems will be reduced voltage.
FERC added that it would consider jurisdictional recommendations by
states that take into account other technical fadon that the state be!ieves arz appropriats
in light of historical uses of particularfaciiities. Order 888-A rsafimed that approach and
the tests to distinguish between state and Federal jurisdiction (Fed. Reg. Vol. 62, No. 50,
P12.372). The order also recognized that the test does not resolve all possible issues, but
is designed for flexibility to include unique local characteristics and usage. (Rule 888-A, 62
Fed. Reg. 12,274, P12279).
FERC approved such a specific state recommendation in PacZc Gas and
Electric Co., ei a/., Docket No. EL96-48-000 (issued October 30, 1906); 77 F.E.R.C.
P6 1,077; 1996 FERC LENS 1975. Paciric Gas accepted a de!ineation of certain lines of
three major California utiiities as psrt of that state's electric industry restructuring. Tine
. . , .. . uiiiiiies Teszrin :he zbiiiy io inznge :he initial cs:lrrc,iicr ES lses ci :hs iai::li!es :nance.
sincs ir may have muitipie LISEC.
-I n e 'exndng ~lsesm' ethod aca~rnmcdarecs ;zr+ -eguiaior{ sartlernenis.
the cecaiiar~iieso f eich sysrern. the h~s~on~cC : S i ~ ! ~ i ~:ir i1g1 0 L ~ ~ I C "USSiS n ~i5i2 ch
uiiiity s ~tegraredtr ansm~ss~osny stem. Consequenily . ~iffirer-ie sults were wzcnec: io r
each uilliiy's system.
The delineation between transmission and nisikcuiion is impc~antn, ot just
for de?ermining state or Federal jurisdiction, but also, to ensurz etch company's
appropriate recoveq of stranded costs from retail cusroners, for allocation of
administrative and general and operation and maintsnancs expenses, as well as for
development of any acczss charges (and associated cost sucpcri) for use of a utiliv's IS0
grid faciiities.
COMMENT
None.
PART 7
FEDERAL ISSUES
7.1 Two-County Rule.
7.1 .I What is it, how does it affect a utility in a competitive environment,
and what resolution is possible?
ANALYSIS
While one cornrnenter noted %ere is no reason to ssgresaie this particular element
for separate consideration and treatment," others who have raised it believe it important
to discuss because it may, like other Federal issues presented herein, be an impediment
;c a :air'/ P 3i~tic:~arioinn ;he csrnperirifie tzvironmenr csnremgizrsa, 2. !i :he fiuier.
--- C+r;ziri!i :=xC. in Ruie 888 recacnized :he threat of ocen accsss recuiremenrs ia
ccnrinc~cJ S? ci two-counry financing and provided some saiurions.
-
I \4*ic-Coufnin~a ncing or "local furnishii;cl bonds provide 5nancing in the form oiiax-lxemcr
2cncs far "faciiities for the local furnishinc of e!ectt-ic energy or gas" ii iilch kciiiiies
are gar. 3 i a system "providing sewice to the gznerai populous not excocding the lsrger
of $NO C S ~ ~ I ~ U OcUoSun ties or one city and a contiguous county." internal Revenrie Code
gl42(a)(8). The Internal Revenue Servic. has added two additional conditions for such
tax exempt bond status: (I) generally, the total amount of -.Iectriciiy generated by facilities
connected directly to the local grid together wiih the amount generated by that utility's
remote generating facilities, cannot excsed in any year the total amount of eiectricity
consumed in the local service area; or (ii) actual metered flows of e!ednciiy at each
interconnection point are at all times inbound to the local system. A utiiiry with such
financing that ceases to meet these conditions loses the favorable interest rate on such
financing. Tne utility's bondholders lose the tax-sxernpt status of the bonds which have
been sold to them and must be made whole by the utility according to the terms of the
bonds.
Competitive generation may impact this financing. FERC's solution in Order 888 was
to exempt a utiiiry from reciprocal service if providing such service would jeopardize the
tax-exempt status oithe bonds. Order 888, mimeo at 376-377. The IRS also amended
its rules to accommodate a mandatory FERC wheeling order issued under §211 of the
Federal Power Act and retain the tax exempt ststus. I.R.C. §la2(f)(Z).
-.
I ne C Cri iies do ncr disturb wo csunrj 5nanc:nc as ions ss no :5irigis are msce
. -
wnich spec:v sn cobiigation for such a flnancsa inriei to serve ourside 3i : h w~c -.:sunr/
area. Paflies have zrgued earlier in this Ooc!